Are the UK house prices set to fall? It’s not that simple…

Most property markets in the UK have seen double-digit percentage growth over the past 24 months both through and after the global pandemic as buying motives and drivers changed and created the idea that the market was overheated. Considering this, the current cost of living crisis, high inflation, and increasing interest rates, what could this mean for the UK housing market?

The biggest factor in the UK housing market is simply one of demand and supply. Chronic undersupply of new housing in the UK has been endemic for many years with many governments making it part of their manifesto to build more homes and failing to meet their own targets.

UK planning laws also make it difficult for developers to get planning permission as this is controlled by local authorities and governments who consider the environmental impact, overdevelopment, and complex planning laws. Currently, Westminster is debating legislation that stipulates local authorities are to be targeted on new properties developed in their areas. This is unlikely to become law as the preference is to not pressure authorities to allow unsuitable developments.

What can happen to the property market in a recession?

Recessions do occur and are driven by many factors. However, the severity thereof can vary widely. The last UK recession occurred due to the Covid-19 pandemic, lasting for six months. During this period the GDP dropped by 21% because of the lockdowns implemented to minimise the impact on the health of the nation. 

Recessions can be caused by many factors. Previous instances, including the 2008 global financial crash (GFC) were caused by a lending and mortgage crisis in the USA where finance companies were given mortgages in the sub-prime market to borrowers who ultimately could not afford to pay the loans. 

Prior to this, the UK experienced a recession in 1989, as a result of the government increasing interest rates to try to bring down high levels of inflation.

The 1989 and the 2008 GFC recessions are the only two instances in the last 70 years where house prices have dropped by more than 10%.


The 1989 Recession & Global Financial Crisis 2008

In late 1989, the UK government and the Bank of England increased the interest base rate to its highest level in 43 years, 14.88%. These interest rate increases were implemented to combat inflation and maintain the value of the Sterling in the EU Exchange rate mechanism. 

This meant that consumer spending and business confidence dropped sharply and as a result so did property transactions and prices, dropping by 20% from 1989 to 1993. The UK’s capital, London, was hardest hit, with property prices dropping by 32%.

The GFC originated in the USA and had a domino effect on the financial markets around the world. Lenders in the USA began to relax the criteria around lending. They started selling high-risk, highly leveraged mortgages in the subprime market which subsequently collapsed, exposing many financial institutions that had bought these packaged lending deals as part of their financial portfolio.

The UK registered 141,893 residential transactions per month in the 12 months up to April 2007. As a result of the GFC, the number of transactions dropped sharply for the next 24 months by 12% to 124,401 per month. During 2008 and 2009, they dropped further by 47% to just 66,338 sales transactions per month. Property prices also fell on average by 15% between the 18 months from January 2008 to May 2009. 

It is worth noting that large areas of the UK recovered their pre-GFC property prices within just three years.

What is Happening Now?

The current property market is not the same as in previous recessions where some important parts of the economy are struggling. For example, the UK still has historically high employment levels with very little unemployment.

The UK government introduced a stamp duty tax holiday during the pandemic, giving a tax break on the first £500,000 of a property’s value, leading to an artificial increase in the number of transactions across the UK as buyers took advantage to save fees. 

The average number of monthly transactions between April 2010 and April 2020 was 92,687. During the stamp duty tax reduction period and the 24 months to April 2022, the average monthly number of transactions increased to 106,456, just under 15% above the previous ten years' average monthly transactions. 

After this increase and the reintroduction of normal taxes, the expectation was that the following period would see a return to more average levels. However, provisional estimates predict that the number of transactions in 2022 will still exceed the ten-year average to April 2020 and exceed 100,000 per month with increasing interest rates leading buyers to reassess their position and the cost of living raising even further questions about what they are now able to afford. 

Since the GFC in 2008, interest rates in the UK have been extremely low and far less than the average from the previous 30 years. In the last 50 years, the average interest rate (base rate) in the UK has been 7.15%, meaning the current rate at 3% is still attractive, despite seeing increases in 2022.

Mitigating Factors

  1. Low Unemployment 

The current UK unemployment rate is 3.6% which is the lowest rate since the same period in 1974. Typically, anything under 4% is considered full employment, reducing the risk of affecting the housing market.

  1. Less Highly Leveraged Mortgages

Currently, 32% of houses are owned with a mortgage which is down from 40% in 2006. This is due to an increase in private renting as well as the aging UK population, meaning the proportion of homes owned outright has also risen and is now the largest tenure in the UK at 33%.

As a result of controls in the financial sector since the GFC, the number of highly leveraged households in the UK, those with high percentage loans, is now very low and remains so despite the Bank of England raises interest rates.

There is still room for mortgaged households (compared with the pre-GFC period) to absorb any increase in cost. For every £100,000 borrowed on a standard 25-year mortgage term, a 25 base points rise in the base interest rate equates to an estimated additional £12 cost per month.

  1. Historical Demand and Supply In-balance

Since the late 1970s, the UK has failed to build the number of homes required to meet the 300,000 per annum national target, typically falling short by about 100,000 homes per year. Between 2015 and 2019, the UK built an average of just 190,150 new homes per annum, falling short of the target by 549,250 homes across the five years. JLL now forecasts that the housing shortage is increasing by more than 600,000.


Whilst there are headwinds in the UK and globally that are currently putting pressure on UK property prices, a crash is highly unlikely based on the levels of employment, reduced leverage in the mortgage market, and the fundamental lack of supply that will be very difficult to address in the short term.

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