What impact could a recession have on the UK property market?

August 31, 2022

The repercussions of a recession can be far-reaching, but what about the long-term outcome for the UK property market?

It’s impossible to ignore the current forecasts for the UK economy, with the Bank of England predicting a recession from the fourth quarter of this year, along with a peak inflation level of more than 13% by the end of 2022.

But how big an impact could this have on the country’s housing market? While it is impossible to predict the effects at such an early date, historical data and patterns can help to paint a picture of how the sector is likely to fare over the long term - which can be much more important to property investors than any short-term peaks and troughs.

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Recessions: then and now

One important point to note is that the current recession we could be facing is very different to the financial crisis of 2007/2008. That downturn was directly linked to insufficient regulation in the mortgage market which led to over-lending, pushing up house prices and creating a ‘bubble’, which then collapsed when debts became unpayable. Lending became much more restricted as a result, bringing house prices crashing down and tipping the economy into a recession.

The current economic slump is linked to the ongoing war in Ukraine as well as the after-effects of the Covid pandemic putting a strain on the economy and causing inflation to spiral. With disruption to oil markets and hold-ups in the global supply chain, prices are rising and this limits people’s spending power and market confidence.

But it is important to also note the positives of today’s market. The pandemic has accelerated house price growth and housing market demand in the UK to a level that has surprised many experts, who had predicted the opposite effect in some cases. We’ve experienced rapid growth post-Covid, and some argue that a flattening out now is to be expected.

The UK also has record employment levels at the moment, with the latest ONS figures showing the employment rate was at 75.5% in the three months to June 2022. Furthermore, although interest rates are on the rise, they remain at historically low levels, and appetite for UK property continues to be extremely strong.

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Do your research and proceed

From a property investment perspective, another key point to note is that, even through a recession - or even especially through one - the private rented market is crucial. Tenant demand currently far outweighs the number of properties available, with Propertymark recording 127 new prospective tenants per agency member branch in its latest data, while the average number of rental homes listed is just 11.

As noted in our previous blog, property investors tend to trust bricks and mortar for its long-term appreciation, so while the recession could last for a year or even more according to some forecasts, the impact should be lower for those who plan to hold onto their properties for ten years, for example, and rent them out.

Speaking on whether house prices will be drastically impacted by a recession, Richard Donnell, executive director of property portal Zoopla, believes it depends on the severity of the slump, and the current outlook is “not a repeat of previous downturns”.

While he acknowledges that the market is bound to be affected by rising mortgage rates and the squeeze on people’s finances, the rate of house price growth is set to slow rather than fall over the coming months.

Referring to the last financial crisis, Donnell says: “The 2007 global financial crisis saw the availability of mortgage finance contract, making it much harder for people to borrow, reducing demand for homes.

“This, together with rising unemployment, resulted in average house prices falling by 12%. This led to fewer homeowners moving and the recovery in market activity started in London from 2010 and the wider market from 2013.”

He also notes that, rather than apply a ‘wait and see’ approach to buying property, historic evidence indicates that there is no better time than now.

“The reality is that there have only been 31 months with house price falls in the last 20 years,” he says.

“Those months were all between 2008 and 2012. So the advice would be not to wait and hope for homes to become cheaper.”