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5 Hard Facts About UK House Prices During Recession

The constant refrain of the weakening UK economy, recession and house prices in the news lately, has been like a bad case of deja vu. All that doomsaying is getting tedious—especially when dramatic headlines send readers into an unnecessary panic. 

As investors, It is essential to sift wheat from chaff: to retain what’s expedient for opportune and profitable change, and discard what makes little difference to our dollars and sense (pun intended)! How? Buckle up and read on to learn more.


Recession has been a hot topic in the news. In fact, the media has been waffling about recession in the UK for more than 3 years now. Heck, pundits have been beating on the same gong since the EU Referendum in 2016.  Many, including the IMF, had predicted that Brexit would trigger a recession and, interestingly, while Brexit happened, recession did not.

When Covid struck, the economic soothsayers rallied yet again and, this time, a recession did happen, although the UK made a strong recovery in just a few months. Fast forward now to 2022-23, where the spectre of an impending recession looms large yet again. But before you start to panic, take a moment to ponder the following: 

3 Important Questions To Ask Yourself 

#1  Which country has not grappled with economic contraction or slid into recession after the pandemic

#2  Even if a recession does happen, is this the UK’s first. Britain has recovered and learnt from recessions past. 

#3  Are predictions 100% accurate? It is important to weigh predictions with fact. 

Context: Inflation, Recession, Everything In Between & the Effect on UK Property

Interest rate rises and the resulting hikes in mortgage rates are an economic reaction, a necessary evil. When inflation is low and the economy needs a jumpstart, the central bank’s usual response is to drop interest rates to stimulate the market (note: mortgage rates are directly affected by interest rate rise and fall). An overstimulated economy causes inflation and central banks react by raising interest (benchmark) rates. Recessions can happen after an inflationary period, and can result in the softening of house prices. In short, these incidents are cyclical and linked. 

The image below illustrates the rise and fall of the interest rate cycle. The last time UK interest rates were as high as current times, at 5.25%, was in 2008; rates dropped drastically in 2009 after the Global Financial Crisis to stimulate the economy.

Interest rate rises and the resulting hikes in mortgage rates are an economic reaction. The last time the Bank of England raised interest rates to 5.25% was in 2008. Rates were drastically slashed following the Global Financial Crisis to stimulate the economy. Credit & source: Economics Help & BOE

TOP 5 FACTS YOU NEED TO KNOW: READING BETWEEN THE LINES

#1   The Media’s Job & The Reader’s Responsibility

Are we saying there is no truth in the news? Heaven forbid. But, know that every piece of news in the public domain is built upon an angle; and headlines, as a rule, are meant to be catchy—that is the media’s job. What’s more eye-catching than the dramatic, the alarming and the bleak? 

Example: On 22nd Sept, Bloomberg published an article with a dramatic headline of ‘UK Economy Headed for Rocky End of 2023 and Risk of Recession’. This article was quite the mind***k—a very ‘if this, but that’ situation—because the gloomy headline had enormously overshadowed the great takeaways contained within the article, such as inflation having slowed down quicker than anticipated (meaning the rate hikes worked!), wages rising faster than inflation, and retail sales and consumer confidence improving.

As investors, our responsibility is to turn on our brain, use our common sense, and properly read the news articles to understand what is really being said. Reports published by independent economic/ research houses (e.g Hometrack, Nationwide, ONS) also help provide a good perspective of the market situation. 

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#2   Focus On Specifics: Area vs Average

Investors buy properties in specific locations, i.e cities. However, the media reports on recession and house price falls as a nationwide average, which is not representative of a specific region or city. For example, although Zoopla reports that average house prices in the UK had dipped by 0.5%  in September 2023 (caused by the mild drag in house prices from cities in South England), house prices were still registering growth in cities like Manchester and regions like the Northwest, albeit at a slower rate due to the speed of interest rate hikes. In undersupplied markets like Manchester, price growth rates will pick up once the market normalises, as part of the property cycle. Choosing the right cities to invest in is crucial to price and rental growth and avoiding unnecessary panic, and something that we teach in our masterclasses using the G.O.L.D.M.I.N.E © strategy. 

Despite the overall 0.5% dip in average house prices in the UK (caused by the mild drag in house prices from cities in south England), cities like Manchester and regions like the Northwest were registering house price growth. Note that media reports on recession and house price falls as a nationwide average which is not representative of a specific region or city. Source & credit: Zoopla House Price Index, Sept 2023


#3   House Price Falls: Did Prices Actually Plummet or Is It A Slowdown in Annual Growth?

On 1 Sept, the Guardian newspaper published an article titled ‘UK House Prices Fall at Fastest Rate Since 2009, Says Nationwide’. The media has published similar reports on many other occasions and will continue to do so in the future. Headlines like these spark panic among investors who tend to immediately assume the worst.

Note that for the sake of brevity (and drama), the media often uses the term “house price falls” or “house price declines” to refer to the slowdown in the current annual growth rate of UK house prices compared to the previous year. Hence, were you to read the actual document cited in that same Guardian article, you would notice that Nationwide described it as a softening in the annual rate of house price growth.


#4 Historical Evidence: UK Housing Resilient in the Face of Recession

House prices tend to soften in a challenging economy, but are highly unlikely to crash or fall violently, or stay low for long in an undersupplied market

Resilience in the Face of Recession: UK house prices have remained on an upward trend despite the many recessions that have happened over the years. Source: Nationwide
Resilience in the Face of Recession: UK house prices have remained on an upward trend despite the many recessions that have happened over the years. Source: Nationwide

The last time the UK had experienced a significant fall in house prices was following the Global Financial Crisis in 2008. However, if you study the history of house price growth in the UK, you’ll begin to understand the resilience of the housing market. The chart above shows how UK house prices have remained on an upward trend despite the many recessions that have happened over the last 60 years.


#5     Fundamental Driver of House Price Growth: Undersupply

Undersupply is the cornerstone of capital and rental growth in a housing market. House prices in undersupplied markets tend to be more stable in the face of economic turbulence. Why? Because everyone needs a roof over their heads regardless of how the economy is. When mortgage rates are too high, such as in times of inflation, the demand for rental property goes up because it is a cheaper alternative to buying. Rents then go up because of the increase in rental demand.

According to a 2023 report, the UK’s acute housing deficit will take 50 years to fill, even if the government reaches its current homebuilding target of 300,000 per year. Source & credit: Economics Help & House of Commons Library, UK

The UK housing market has been chronically undersupplied since the 1940s, with a backlog of 4.3 million homes missing from the national housing market compared to the average European country. According to a 2023 report, this deficit will take 50 years to fill even if the government reaches its current homebuilding target of 300,000 per year. It will be challenging to even meet this target simply because the rate of home building already struggles to reach above 150,000 – 200,000 a year. 

See also  Investment Vehicles: Owning A UK Property
Demand for rental property and inflation will drive rental price growth. Rental rates rose by 20% in just 1 year in Manchester due to acute housing undersupply. Credit & source: Urban Bubble & JLL

Thus, high prices coupled with high interest rates will deter prospective buyers from taking out a mortgage and choosing to rent instead. Demand for rental property and inflation will drive rental price growth. For example, rental rates rose by 20% in just 1 year in Manchester due to housing undersupply.


Recession & Trends in the UK Property Cycle

The rule of supply and demand dictates that property investment is a mid- to long-term game. Higher interest rates means expensive mortgages, which will result in a temporary slowdown in buying activity. Price growth will soften as people adjust to new norms. In the current UK property cycle, affordability has become a challenge, hence the locals opt to rent instead.

The subsequent growth in rental demand and competition for rental property amongst tenants then causes a spike in rental price growth, which is what we are witnessing currently. However, as rents continue to skyrocket in the next 1 – 2 years (and interest rates start to normalise), people will find it cheaper to buy a house rather than rent. The subsequent and resulting increase in house buyers will drive house prices up further. In short, undersupplied markets tend to experience more price growth or more rental growth in different seasons of the property cycle. Either way, landlords win. And thus, the cycle continues… 

The UK's housing undersupply has caused house prices to increase even during recession. Over the years, more locals are opting to rent than buy, due to unaffordability. Source & credit: Economics Help
The UK’s housing undersupply has caused house prices to increase even during recession. Over the years, more locals are opting to rent than buy, due to unaffordability. Source & credit: Economics Help


Conclusion: So How Savvy an Investor Are You?

There will likely be more bad news in the media over the coming months as the markets ride out the effects of inflation. Seasoned investors will remain unfazed by temporary blips as they understand the dynamics of supply and demand, and that the property cycle is a fact. They understand that the resilience of property as an investment lies in the fact that everyone needs a home. In economically challenging times, expensive holidays and hobbies, and fancy meals—not the roof over our heads—will always be the first to go. 

Savvy investors also know the advantage of investing in a buyers market and in choosing projects, like Middlewood Locks, that are priced competitively because the developer had locked in land and construction prices earlier. With construction and land prices at such a current high, developers who bought land in more recent times for new builds are now launching their projects at £400K+ whilst Middlewood Locks is launching at a far lower price of £300K+. 

However, if you’re in it for a quick buck simply because you cannot see beyond your foot, please invest in stocks. 

Having a Proven Property Game Plan is essential to making the right investment decisions and understanding the investment market. Drop us a comment to learn more or to find out about our latest private deals such as Middlewood Locks. Follow us on Facebook, Instagram and YouTube for the latest updates. 

By Vivienne Pal 

Source:

  • https://www.theguardian.com/business/2016/jun/18/imf-says-brexit-would-trigger-uk-recession-eu-referendum
  • https://www.imf.org/en/Blogs/Articles/2020/04/14/blog-weo-the-great-lockdown-worst-economic-downturn-since-the-great-depression
  • https://www.standard.co.uk/business/uk-economy-historic-recessions-a4520961.html
  • https://commonslibrary.parliament.uk/research-briefings/cbp-8866/
  • https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/covid-19-recession-touches-all-5-continents-as-recovery-looks-distant-60168984
  • https://www.reuters.com/article/us-britain-eu-blackrock-idUSKCN0ZS0TO
  • https://www.economicshelp.org/blog/5709/housing/market/
  • https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate
  • https://www.bloomberg.com/news/articles/2023-09-22/uk-economy-headed-for-a-rocky-end-of-2023-and-risk-of-recession#xj4y7vzkg
  • https://finance.yahoo.com/news/uk-economy-headed-rocky-end-153007796.html
  • https://www.zoopla.co.uk/discover/property-news/house-price-index/# (Sept 2023)
  • https://www.theguardian.com/business/2023/sep/01/uk-house-prices-fall-at-fastest-rate-since-2009-says-nationwide
  • https://www.placenorthwest.co.uk/manchester-rents-are-20-more-expensive-than-last-year/
  • https://www.nationwidehousepriceindex.co.uk/reports/august-sees-further-weakness-in-house-prices
  • https://www.nationwidehousepriceindex.co.uk/reports/august-sees-further-weakness-in-house-prices
  • https://researchbriefings.files.parliament.uk/documents/CBP-7671/CBP-7671.pdf
  • https://www.centreforcities.org/publication/the-housebuilding-crisis/
  • https://www.economicshelp.org/blog/7243/housing/housing-supply-in-uk/
  • https://residential.jll.co.uk/insights/research/big-six-residential-development-report-summer-2023
  • https://csiprop.com/why-inflation-weak-pound-recession-are-the-perfect-storm-for-uk-property/
  • https://csiprop.com/why-manchester-rental-rates-grew-20pc-outperforming-london/

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