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Will there be a housing market crash?

By Ryan Hogg and Jekaterina Drozdovica


Updated

A terrace of houses painted in a variety of pastel shades
Home prices have fallen in the UK, Canada and other major economies as higher interest rates hurt demand. – Photo: Ewelina W / Shutterstock.com

Investors and homeowners are bracing themselves for a potential housing market crash after two years of relentless growth. House prices have declined in the UK, Canada, and other major economies as higher interest rates and inflationary pressures dampen property demand

Will there be a housing market crash in 2023 and by how much could prices correct? Here we take a look at the key factors behind the recent declines and forecasts from analysts on what to expect. 

What is a housing market crash?

A housing crash typically follows a housing bubble. That’s a market where the average price of a home is much higher than its value based on underlying fundamentals. This can occur through excessive lending that isn’t immediately noticed by the market.

The financial crash of 2007/08 had a dramatic and persistent impact on the price of homes in the Western world. In the US, house prices fell 7.1% in the fourth quarter of 2008, then by another 7% in the first quarter of 2010. These large declines came among 19 consistent quarters of negative house price growth.

In the UK, house prices fell by as much as 15% between 2008 and 2009 – a shorter, deeper contraction than in the US. It took the UK until 2014 to recover losses and reach the same level as average prices in 2007. 

This has been attributed to a ‘sub-prime’ lending crisis, where a number of mortgage providers approved lenders unable to repay their debts, with these mortgages being tied up in overvalued securities, eventually rotting the global financial system and eroding the value of homes.

But while a housing crash would initially bring pain to homeowners and real estate investors, its effects on the wider economy can be even sharper. 

According to the Bank of England (BoE), the value of a home amounts to a large proportion of the average individual’s asset value, giving them the confidence to spend in the economy. A crash wipes out that confidence, and can push some into negative equity – when the value of their home becomes lower than the price they agreed to pay for it. 

That feeds into consumption patterns, which can see low demand bleed through the economy, hurting equities and causing implications for macroeconomic policy.

With prices now rising faster than during the last bubble, it has led some to believe the next painful correction is around the corner. But, analysts argue, there are plenty of reasons to believe the bottom of the housing market won’t fall out this time.   

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Higher interest rates hurt buyers' affordability 

The average price of a UK home dipped by 1.4% in November to £263,788, according to the latest Nationwide House Price Index. Not a housing market crash yet, but the fastest pace of decrease in home prices since June 2020 and the third consecutive month of decline.   

While prices were still up year-on-year in November, their annual growth slowed to 4.4%, from October’s 7.2%. 

UK house prices, 2018 - 2022

A spike in mortgage rates to an eye-watering 5.24% in October, the highest since 2008, was the key factor behind the decline, damping affordability of UK homes and alarming potential buyers. 

The BoE has increased the interest rate seven times in 2022, hiking it by 75 basis points (bps) in November to 3%, the largest rate hike since 1989. The latest figures revealed that net borrowing of mortgage debt was at a yearly low in October, and mortgage approvals fell 10% to 59,000. Confronted by higher mortgage costs, coupled with the cost of living crisis, buyers struggle to borrow, hurting housing demand. 

UK mortgage rates, 2018 - 2022

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Robert Gardner, Nationwide's chief economist, commented:

“While financial market conditions have stabilised, interest rates for new mortgages remain elevated and the market has lost a significant degree of momentum. Housing affordability for potential buyers and home movers has become much more stretched at a time when household finances are already under pressure from high inflation.”

A gloomy outlook on the housing market crash can also be seen in Canada, where new home prices fell for two consecutive months in September and October, by 0.1% and 0.2%, respectively, according to Statistics of Canada. The national average home sale price decreased 9.9% in October, according to the Canadian Real Estate Association report, with sale activity down 3.9% between August and September. 

There are reasons for optimism, according to CREA’s analysts. The number of sales began to rise for the first time since the start of the hiking cycle in 2021. Shaun Cathcart, CREA’s senior economist, noted: 

“October provided another month’s worth of data suggesting the slow down in Canadian housing markets is winding up. Sales actually popped up from September to October, and the decline in prices on a month-to-month basis got smaller for the fourth month in a row.”

US home prices suffered two consecutive months of decline in July and August of 0.6% and 0.7%, respectively, but recovered in September, posting an 0.1% increase. Pending home sales, however, are still falling – most recently by 4.6% in October – as mortgage rates hit 20-year highs before easing in November. Gurleen Chadha, US economist at Oxford Economics, commented:

“Despite recent declines in mortgage rates and home prices, homebuying affordability is still sharply lower than at the start of the year. As a result, we expect existing home sales to remain under pressure through much of 2023. An emerging recession, which we expect will result in some job losses, will also weigh on home sales next year.”

Home supply to make or break housing market crash

Another ingredient in the real estate market crash recipe is housing supply, and the supply-demand dynamics. In October, ING analysts noted that US home offerings may be gaining momentum. 

“At the same time housing supply is on the rise with the stock of new homes for sale up 50% since February while the number of existing homes for sale is up 64% since the October 2020 low,” said James Knightley, ING’s chief international economist.

“This means we are moving from a market that was suffering from significant excess demand to one where there is a risk of modest excess supply dominating the story over the coming year, especially if recessionary forces result in rising unemployment.”

Globally, however, the housing supply may be vulnerable to inflationary pressures as homebuilders struggle with higher costs.  

“Heightened construction costs have lifted replacement costs of existing buildings, which will support their operating fundamentals over the medium term,” said Mark Unsworth, Associate Director at Oxford Economics.

“This will limit new supply which will eventually generate enough rental/value growth to support new projects. Over the short term, however, higher construction and financing costs in the absence of value growth will push land values lower, especially as we now foresee weaker leasing sentiment next year.”

Housing market crash predictions for 2023 and beyond

Will the housing market crash as mortgages become unaffordable and recession looms? While there are many uncertainties at play, most analysts foresee some sort of correction.  

Oxford Economics, in a November outlook on house price crash scenarios, expected advanced economy interest rates to peak in 2023, prompting a double-digit home value correction over 2022-2023, noting: 

“Presently, rising interest rates, high valuations, and squeezed real incomes pose serious challenges for global housing markets. Under our baseline forecast, these risks look especially acute in a subset of economies, with markets like Canada currently experiencing a significant downturn, while others, such as Australia, France, the Netherlands, and the UK, are on track to see modest-to-moderate corrections.”

Daniel Mahony, UK Economist at Handelsbanken, shared the downbeat sentiment about the housing market bubble bursting in the UK, noting on 1 December that while the UK market is set for a correction, the impact won’t be homogenous. He said: 

“The supply of homes coming to market is falling, but demand appears to be dropping at a faster rate meaning it seems likely that average prices will see nominal falls in 2023 and, of course, even more severe decreases in real terms due to the high inflation environment. However, the upcoming correction is unlikely to be felt uniformly across the UK: for example, London and the South East could be hit especially hard given the above average loan to income ratios in these regions.”

Nationwide’s Gardner, however, pointed that employment conditions remain strong, with most mortgages resilient to interest rate increases due to their fixed-term nature: 

“Moreover, household balance sheets remain in good shape with significant protection from higher borrowing costs, at least for a period, with around 85% of mortgage balances on fixed interest rates. Stretched housing affordability is also a reflection of underlying supply constraints, which should provide some support for prices.”

Final thoughts on housing market crash

Note that analysts’ predictions on whether a housing crash is coming can be wrong and shouldn’t be used as a substitute to your own research. Always conduct your own due diligence before trading, looking at the latest news, fundamental and technical analysis.

Past performance does not guarantee future returns. And never trade money you cannot afford to lose. 

FAQs

Is the housing market going to crash?

Analysts mentioned in this article expected house prices to decline globally amid higher interest rates and a recessionary environment. However, whether prices decline severely or moderately is hard to foresee. Note that analysts’ predictions can be wrong and shouldn’t be used as a basis for financial decisions.

What happens when the housing market crashes?

Housing crash typically follows a real estate bubble, where the average price of a home is much higher than its underlying value. Housing crashes can dramatically hurt consumer confidence as the value of a home amounts to a large proportion of the average individual’s asset value. A crash wipes out that confidence, and can push some into negative equity – when the value of their home becomes lower than the price they agreed to pay for it.

What caused the housing market crash ?

The financial crash of 2007/08 had a dramatic and persistent impact on the price of homes in the Western world. In the US, house prices fell 7.1% in the fourth quarter of 2008, then by another 7% in the first quarter of 2010. These large declines came amongst 19 consistent quarters of negative house price growth. This has been attributed to a ‘sub-prime’ lending crisis, where a number of mortgage providers approved lenders unable to repay their debts, with these mortgages being tied up in overvalued securities, eventually rotting the global financial system and eroding the value of homes.

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