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UK house price crash: Will stamp duty cut soften blow of interest rate hikes?

By Fitri Wulandari

Edited by Jekaterina Drozdovica


Updated

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Typical UK terraced houses in West Hampstead, London
Sharp interest rate hikes may finally spell end to lengthy growth period – Photo: Shutterstock, I Wei Huang

UK house prices growth is set to slow to single digits, with higher mortgage costs, recession fears and soaring energy bills all likely to dampen demand. 

Property prices in the UK enjoyed robust growth between 2020 and 2021, getting a boost from the working-from-home trend and stamp duty ‘holiday’. In 2022, however, the country’s housing market is facing aggressive rate hikes by the Bank of England (BoE), in a bid to contain four-decade high inflation. 

As the BoE is expected to continue the policy tightening and inflation is expected to stay in double digits into 2023, will the UK housing market crash?


Here, we take a look at the country’s property market predictions and what factors are shaping them. 

What is a housing crash?

A housing market crash typically occurs after a housing bubble – a period when the average price of a home is significantly higher than its underlying value, usually amid rising demand and limited supply.

Low mortgage rates, improving welfare and easy access to bank loans are a few of the factors that can boost housing demand. The bubble may burst if building companies continue to develop new houses even after demand has started to wane and sales slow. 

When a central bank raises its benchmark interest rate, it can become more difficult to find new buyers. Higher interest rates result in rising mortgage costs, leading to financial hardship for existing homeowners. Homeowners who are unable to pay their mortgages could face defaults and foreclosures, causing more homes to come onto the market.

Economic downturns, particularly recessions, can result in job losses, reduced spare cash and fewer available jobs, all of which reduce demand for homes.

In the most recent recession in the UK, during the financial crisis in 2008, UK house prices dropped by more than 15% in the year to February 2009, according to data from the Office of National Statistics (ONS). By March 2009, UK house prices averaged £154,452, having fallen from £185,782 in January 2008.

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UK house price growth slow in 2022

Recent house price readings have shown that house price increases have fallen to single-digits this year. 

UK property prices rose by 9.5% year-on-year (YOY) in September 2022, easing from 10% in August, according to data from the Nationwide Building Society. The average UK home cost £272,259 in September, down from £273,751 in August.

“There have been further signs of a slowdown in the market over the past month, with the number of mortgages approved for house purchase remaining below pre-pandemic levels and surveyors reporting a decline in new buyer enquiries,” said Robert Gardner, Nationwide’s chief economist.

The Halifax House Price Index, another gauge of the state of the UK housing market, showed that house prices decreased by 0.1% in September to an average of £293,835. This made a significant change from August when prices had risen 0.3%.

Average house price fell in July according to Halifax

The annual growth rate slowed to 9.9% in September, from 11.4% in August, but house prices remained over £30,000 higher YOY.

“Predicting what happens next means making sense of the many variables now at play, and the housing market has consistently defied expectations in recent times. While stamp duty cuts, the short supply of homes for sale and a strong labour market all support house prices, the prospect of interest rates continuing to rise sharply amid the cost of living squeeze, plus the impact in recent weeks of higher mortgage borrowing costs on affordability, are likely to exert more significant downward pressure on house prices in the months ahead.” said Kim Kinnaird, director of Halifax mortgages.

Higher interest rates and soaring energy bills

Nationwide’s Gardner said the housing market was set to slow further as the household budget is hit by BoE interest rate hikes, soaring inflation and an 80% increase in energy bills. 

From December 2021 to September 2022, the BoE implemented several interest rate hikes, raising the benchmark rate to 2.25%. MPC members expected the key interest rate to peak at 4.75% in mid-2023. 

A further rise in the UK’s interest rate will inflate mortgage costs, making house purchases less affordable, particularly for first-time buyers, said Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown.

“Meanwhile, although rents have been rising, the pace of mortgage hikes means that in more expensive areas, the cost of repaying the mortgage could increasingly overtake the cost of renting. This is likely to dampen demand from first-time buyers even further,” said Coles.

On top of heightened mortgage rates, UK residents will face exorbitant energy bills in October. To keep up with rising gas prices, the UK’s energy regulator, the Office of Gas and Electricity Markets (Ofgem), will lift its energy price cap to £3,549 a year, effective from October, up from £1,971 in April.

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Gardner expected sky-high bills to hurt homeowners of the least energy-efficient homes, which are typically period properties. With the new price cap, homeowners could face a staggering £2,700 rise in their annual energy bills for the least efficient homes (rated F-G), and an increase of £1,000 for the most energy efficient homes (A-C).

Will interest rate hikes and high energy bills trigger a UK house market crash?

Gardner did not project a UK house price collapse because the slowdown has been modest and there is a shortage of supply on the market. Galley of Halifax also did not expect UK house prices to drop, as a severe shortage of homes available for sale will likely support high property prices.

Stamp duty cut for UK homeowners

On 23 September 2022 the former Chancellor of the Exchequer, Kwasi Kwarteng, revealed a new growth plan, which included cuts to stamp duty.

Stamp duty is a house tax paid by buyers based on the price of the property they are purchasing. Prior to Kwarteng’s plan, the first £125,000 of a property’s value was tax-free. Buyers paid 2% of the property’s overall value in tax up £250,000, and 5% of the value after that amount up to £925,000. 

The new plan doubled the amount of a property that is exempt from tax to £250,000. Beyond that, buyers will be taxed 5% of the value of the home up to £925,000, and 10% after that up to £1.5m.

The chancellor stated he believed “cuts to stamp duty will get the housing market moving and support first-time buyers to put down roots.”

On 14 October, following a request from UK Prime Minister Liz Truss, Kwarteng stepped down as chancellor, and was subsequently replaced by former foreign secretary Jeremy Hunt.

Though Hunt would go on to scrap the majority of the policies in Kwarteng’s September plan, he did retain the stamp duty cut.

However, reactions from analysts and experts have been mixed. Sarah Coles and Helen Morrissey, analysts at Hargreaves Lansdown, wrote:

“The stamp duty cut will ease some of the pressure on buyers right now. It’s particularly welcome as house prices rocket and interest rates continue to climb. But in the medium term, it risks making life even harder.
“When first-time buyer relief was introduced in 2010, the government assessed the impact the following year. It found cutting the cost of stamp duty by one percentage point, increased first-time buyer prices by up to 0.7 percentage points – wiping out a lot of the cost saving for first-time buyers.”

Alexander Tziamalis, a senior lecturer in economics at Sheffield Hallam University, also believed the tax cuts “could potentially help some first time buyers with small deposits to buy a property”. 

However, he added that “the effect of the discount will be to keep house prices high, at least at first – not what you want when you’re trying to buy.”

Will there be a UK house price crash?

As the UK housing market is bracing for higher mortgage rates, soaring energy bills and inevitable recession, do analysts think that there will be a UK property market crash?

“Looking ahead, house prices are likely to come under more pressure as those market tailwinds fade further and the headwinds of rising interest rates and increased living costs take a firmer hold. Therefore a slowing of annual house price inflation still seems the most likely scenario,” said Galley.

In June, global real estate consultant Knight Frank revised its quarterly UK house price forecast upwards to 8%, from 5% in its April forecast. The firm predicted UK house price growth to slow sharply to 1% in 2023, recovering to 2% in 2024 and 2025, and to 3% in 2026.

“We still believe annual growth will return to single digits by the end of the year as supply builds and demand is put under pressure by rising mortgage rates and spiking inflation,” wrote Tom Bill, Knight Frank’s head of UK residential research.
“But one lesson from the pandemic is that nothing reverts to normal overnight, which is particularly true in a relatively slow-moving market like residential property. We therefore expect a more gradual return to earth for prices.”

Final thoughts

Analysts expected UK house prices to remain firm, supported by acute shortage of available houses for sale. However, the growth rate was predicted to slow as high interest rates, anticipated economic downturn and soaring energy bills will dampen buyers’ appetite. 

Remember that analysts’ UK house price predictions can be wrong. You should always conduct your own research before trading, looking at the latest news, technical and fundamental analysis and a wide range of analyst commentary. Bear in mind that past performance does not guarantee future returns, and never trade money that you cannot afford to lose.

FAQs

Will UK house prices fall as interest rates rise?

Analysts did not expect UK house prices to fall despite anticipated higher rates, as a shortage of houses for sale could support prices. They did expect house price growth to slow to single digits in the coming years.

Remember, however, that their forecasts can be wrong.

Will UK house prices fall in 2022?

The analysts we spoke to for this article expected UK house prices to remain rising this year, as a lack of houses for sale is set to keep prices firm, though the rate of growth was predicted to slow.

Remember, however, that analysts’ views can be wrong. Always do your own research before investing.

When was the last property crash in the UK?

The last property crash in the UK was in 2008-2009, when the UK was in a prolonged recession. House prices dropped more than 15% between 2008 and 2009.

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