UK Faces Longest House Price Downturn in the Western World Amid Rising Interest Rates

Introduction:

The housing market in the UK is bracing for an extended period of decline as shockingly high official interest rates have sent shockwaves through the mortgage market. According to Oxford Economics, property values across the country are expected to continue falling until the second half of 2025. In contrast, other Western countries, such as the United States, France, Germany, and Italy, are projected to experience a rebound in housing prices starting this year and continuing throughout 2024. This blog post delves into the factors contributing to the UK’s housing market downturn and compares it to other countries.

The Impact of Rising Interest Rates:

Liam Bailey, global head of research at Knight Frank estate agents, explains that a gloomier outlook for interest rates has led to increasing forecasts for decline in the UK housing market. Previously, British house prices were expected to recover in early 2024, but projections of interest rates reaching 6% by the end of 2023 have altered this outlook. The recent jump in the Bank Rate from 4.5% to 5% following unexpected inflation data over the past five weeks has further exacerbated the situation.

Inflation and Wage Increases:

In May, inflation remained stagnant at 8.7%, defying predictions of a decrease to 8.4%. Core inflation, which excludes volatile factors such as food and energy prices, rose from 6.8% to 7.1%, contributing to the headline figure. The Office for National Statistics reported a 7.2% increase in wages over the past year, providing consumers with more spending power. However, these wage increases have fueled higher forecasts for interest rates and subsequently contributed to rising prices. Goldman Sachs predicts that inflation in the UK will remain above the Bank’s 2% target for the next three years.

Delayed Impact on House Prices:

The impact of higher mortgage rates on house prices in the UK is taking longer to materialize due to the prevalence of fixed-term mortgages. Most British homeowners opt for two- to five-year fixed mortgages, shielding them from higher costs until their deals expire. As a result, over a million households have yet to experience the full impact of mortgage rate increases, which is expected to prolong the housing market downturn, according to the Centre for Economics and Business Research (CEBR).

Comparisons with Other Countries:

Oxford Economics predicts that house prices in the US will only drop by 5%, and inflation has decreased more rapidly, currently sitting at 4%. This allows interest rates to be reduced earlier compared to the UK. Furthermore, countries like France and Germany benefit from longer fixed-rate mortgages, protecting their housing markets from mortgage rate shocks. In France, where house prices are expected to drop by just 3% this year before recovering in 2024, fixed-rate deals are often available for the entire mortgage term. Germany’s housing market is also anticipated to decline by only 5% and begin recovering by the end of this year.

Factors Influencing the UK’s Prolonged Downturn:

The UK’s housing market experienced a boom during the pandemic, fueled by record-low interest rates of 0.1% and a temporary stamp duty holiday. However, stagnant wages in the country are expected to take a toll on house prices. While pay has increased over the past year, Richard Donnell, executive director at property website Zoopla, highlights that income growth has been poor since 2008. This lack of substantial income growth, coupled with a trend of each generation being less economically prosperous than the previous one, acts as a drag on house price growth.

Conclusion:

The UK’s housing market is facing a significant downturn as rising interest rates continue to impact the mortgage market. Oxford

Economics predicts a prolonged decline in property values until the second half of 2025, while other Western countries are set to experience a housing market rebound. Factors such as inflation, wage increases, delayed impact on house prices, and alternative funding models contribute to the differences observed between the UK and other countries. Stagnant wages and a lack of substantial income growth are additional factors that are expected to hinder house price growth in the UK.