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Economic recession: How would it affect the London property market and could we see a house price crash?


The risks are growing that the UK could slide into a recession. But property experts predict the market will cool rather than crash

By Ella Jessel

An unexpected drop in economic growth for the second month running has led to fears the UK is now facing a looming recession.

GDP has now fallen in both March and April – by 0.1 per cent and 0.3 respectively – and City analysts have warned the first back-to-back monthly falls since early 2020 raises the risk the economy could contract sharply.

Soaring energy prices, growing inflation, and the war in Ukraine are all contributing to the crisis.

While an official recession, defined as two consecutive quarters of decline, might may yet be avoided, the economic outlook has worsened in recent months.

Bank of England economists today revealed they expect GDP to fall by 0.3 per cent in the second quarter of this year as the Bank’s Monetary Policy Committee voted to raise interest rates for the fifth time since December 2021 to their highest level in 13 years.

With a year of runaway house prices, the UK housing market has so far seemed impervious to the storm clouds gathering over the broader economy.

So what will happen to house prices next, and how could this change if the UK is hit by a recession?

Is the UK heading for a recession ?
Lasting months or even years, a financial recession is a period of time where the economy goes into decline and has knock-on consequences on everything from employment to investment and housing.

The UK entered a recession in 2020 due to Covid lockdowns. The economy plunged by 20 per cent between April and June in 2020, as businesses closed and people were ordered to stay at home.

It’s not yet clear whether the UK will enter another recession, but the country’s leading business group the Confederation of British Industry (CBI), has said that it now believes economic growth this year will be 3.7 per cent, plummeting from last year’s 51 per cent.

The organisation’s director-general Toby Danker said this week: “Let me be clear —w e’re expecting the economy to be pretty much stagnant. It won’t take much to tip us into a recession, and even if we don’t, it will feel like one for too many people.”

Could a recession lead to a house price crash?
Typically a recession is followed by a slowdown in house prices. The UK’s 2008 recession sparked by the global financial crisis led to mass unemployment and a 20 per cent drop in property prices, leaving many homeowners in negative equity.

House prices today remain extremely high, but have been artificially inflated by the stamp duty holiday. As the cost of living spirals, inflation goes up and the gap between pay and house prices widens, some experts think it’s only a matter of time before there is a slump.

But according to Nick Whitten, JLL’s Head of UK Residential and Living Research, the chance of a crash is still low.

Whitten said: “Since the Second World War there have been just four occasions when UK house prices have seen a sustained fall — and on each of those occasions there was a spike in unemployment leading to many sellers being forced to sell the home they could no longer afford.

“However, currently UK unemployment is at 3.8 per cent and the number of job vacancies has reached a record high of 1.3 million. We do not expect a crash, but we do expect price growth to cool to circa 4. 5 per cent by the year end.”

The impact on London property
However Tim Hassell, Managing director of central London lettings agency Draker Lettings, said he thought there was “ever increasingly likelihood” of a crash in the next two years, especially in central London.

He pointed out that many property owners have significant mortgages tied to low interest rates, adding: “If interest rates increase by anything above 1.5 per cent over the next two years, then the cost of borrowing will spiral out of control which in turn will force people to sell up and we will almost certainly see a rise in the number of repossessions.”

He added: “At the same time, buyers will have less funds because of the increase in the cost of living and as such, will be less willing or able to buy into a declining market. The UK market is ‘powered’ by confidence and as soon as this confidence diminishes, the housing market will be negatively impacted.”

What will happen to house prices next?
While experts think the housing bubble is unlikely to pop, many think the market is calming down as growth slows after a year of runaway prices. In April, the Bank of England said mortgage approvals for home purchases fell to their lowest level in two years.

Halifax’s most recent house price index showed that while house price growth was still in double digits, it is now decelerating and at its slowest rate since the start of the year.

London house prices rise but ‘frightening level of inflation’ and cost of living crisis likely to dampen market
According to David Ruddock, Head of Residential Operations for agent Carter Jonas, a slowdown is “inevitable” as the level of price growth seen recently is not sustainable.

He added: “However, there is a huge difference between a reduction in monthly growth and prices going down, which we do not predict, as demand still outstrips supply for sales and lettings.”

Marc Schneiderman, Director at London estate agent Arlington Residential, added: “There is no doubt that market sentiment is shifting to a much more cautious and largely negative view of what lies ahead. It is clear that interest rates will continue to rise making the process of buying property more challenging and we will see less people able to borrow large sums, which in turn will reduce market activity and as a consequence both demand for properties as well as values will be diminished.”

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