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House prices: What happens when they fall? What is happening to house prices and could there be a crash?
(about 2 months later)
Annual house price growth has slowed, and the latest monthly figures from both Nationwide and Halifax show a fall. House prices have fallen in recent months, with increased interest rates making mortgages more expensive and high inflation reducing people's spending power.
This follows the Bank of England's decision to increase interest rates to 3%, meaning higher mortgage costs for many. However, although Bank of England interest rates have gone up for the 10th time in a row, some mortgage rates have started to fall.
What is happening to house prices? What is happening to house prices around the UK?
In the last two years, prices rose steeply - by about a quarter - across most of the UK. In 2021 and for much of 2022, prices rose steeply - by about a quarter - across most of the UK.
That pace of growth was much faster than was seen after the 2008 global financial crisis, when houses lost about a sixth of their value. It took five years, on average, for prices to recover. The pace of growth was much faster than was seen during the recovery after the 2008 global financial crisis.
However, prices have now started to slow, with figures from both Nationwide and Halifax showing falls between October and November. However, figures from Nationwide and Halifax show consistent falls in the last five months.
The chart above of annual, rather than monthly, growth shows that year-on-year growth is heading down towards zero. The chart above shows that year-on-year growth is heading down towards zero.
Nationwide warned the housing market looked set to "remain subdued" in the coming months.Nationwide warned the housing market looked set to "remain subdued" in the coming months.
Will house prices fall in the UK? You can use the chart below to compare what's happened to house prices in different parts of the UK.
Monthly changes can be blips, but the UK's largest lender, Lloyds, is planning for an 8% fall next year. Most regions and nations around the UK saw growth from 2015 until the second half of last year.
Some regions like East Anglia and the North East of England have seen prices flatten out rather than falling in the second half of 2022.
And London, which saw prices fall slightly during the pandemic, hasn't seen falling prices yet.
One thing the chart doesn't show is that house prices in London are far higher than the rest of the country.
Will house prices continue to fall?
Monthly changes can be blips, but the UK's largest lender, Lloyds, is planning for an 8% fall in 2023.
In November, the Office of Budget Responsibility (OBR), which advises the government on the health of the economy - predicted that house prices will drop by 9% over the next two years.In November, the Office of Budget Responsibility (OBR), which advises the government on the health of the economy - predicted that house prices will drop by 9% over the next two years.
Big jumps in interest rates put pressure on the amount people can afford to offer for houses, and that means less demand. Big jumps in interest rates have put pressure on the amount people can afford to borrow.
Mortgage affordability also depends on wider cost-of-living pressures like energy bills, wages and job security. The future of house prices depends on the economy as a whole. In turn that means lower offers and less demand for homes overall.
The amount people can spend of their mortgage also depends on wider cost-of-living pressures, such as energy bills, wages and job security. The future of house prices depends on the economy as a whole.
What happens when house prices fall?What happens when house prices fall?
The biggest immediate effect is on people who want to move.The biggest immediate effect is on people who want to move.
Some sellers may decide to delay putting their homes on the market. Homeowners who are considering moving may find they have less money to spend.Some sellers may decide to delay putting their homes on the market. Homeowners who are considering moving may find they have less money to spend.
There were fewer property sales this year than in the 12 months leading up to last summer's surge in prices before the temporary stamp duty reduction ended. There were fewer property sales in 2022 than in the 12 months leading up to last summer's surge in prices, before the temporary stamp duty reduction ended.
But if interest rates stay high, an increasing number of people will come off fixed-price mortgages (about 100,000 each month) to new, higher rates.But if interest rates stay high, an increasing number of people will come off fixed-price mortgages (about 100,000 each month) to new, higher rates.
Some homeowners will find higher these monthly payments unaffordable, making them more likely to sell.Some homeowners will find higher these monthly payments unaffordable, making them more likely to sell.
First-time buyers may find properties are more affordable, allowing them to get a foot on the ladder - assuming they can get a mortgage.First-time buyers may find properties are more affordable, allowing them to get a foot on the ladder - assuming they can get a mortgage.
But a drop in prices can also send shudders through the finances of homeowners who are staying put.But a drop in prices can also send shudders through the finances of homeowners who are staying put.
At the most extreme, they can end up in negative equity - where the amount they have borrowed is greater than the current value of their property.At the most extreme, they can end up in negative equity - where the amount they have borrowed is greater than the current value of their property.
With about a third of household wealth tied up in home values, falling prices can make people feel less financially secure, mean they save more than they spend. With about a third of household wealth tied up in home values, falling prices can make people feel less financially secure and mean they save more than they spend.
Less spending can make an economic slowdown even worse.Less spending can make an economic slowdown even worse.
Are people struggling to pay their mortgage?Are people struggling to pay their mortgage?
Arrears peaked during the 2008 financial crisis, and did not rise significantly during the pandemic, helped by lenders granting payment holidays.Arrears peaked during the 2008 financial crisis, and did not rise significantly during the pandemic, helped by lenders granting payment holidays.
Payment difficulties can lead to banks and building societies repossessing houses, although lenders try to avoid this.Payment difficulties can lead to banks and building societies repossessing houses, although lenders try to avoid this.
More than 200,000 properties were repossessed in the five years after the 2008 crash.More than 200,000 properties were repossessed in the five years after the 2008 crash.
As a result of Covid, repossessions were suspended between March 2020 and April 2021. In the year after they restarted, there were fewer than 4,000.As a result of Covid, repossessions were suspended between March 2020 and April 2021. In the year after they restarted, there were fewer than 4,000.
What happens if I can't afford to pay my mortgage?What happens if I can't afford to pay my mortgage?
Does a drop mean a house price crash is inevitable?Does a drop mean a house price crash is inevitable?
When the Bank of England raised interest rates by 0.75 percentage points to 3% on 3 November, it was the biggest single rise in the cost of borrowing since 1989.When the Bank of England raised interest rates by 0.75 percentage points to 3% on 3 November, it was the biggest single rise in the cost of borrowing since 1989.
How high could interest rates go?How high could interest rates go?
Why does the Bank of England change interest rates?Why does the Bank of England change interest rates?
After the mini-budget, financial markets were forecasting that the Bank of England's interest rate would rise above 6% in 2023.After the mini-budget, financial markets were forecasting that the Bank of England's interest rate would rise above 6% in 2023.
However, traders now expect the peak to be under 5%. You can use the mortgage calculator above to see how rate changes affect monthly repayments.However, traders now expect the peak to be under 5%. You can use the mortgage calculator above to see how rate changes affect monthly repayments.
In the early 2000s property boom, 100% mortgages and cashback offers were not uncommon.In the early 2000s property boom, 100% mortgages and cashback offers were not uncommon.
But after the 2008 financial crash, mortgage lending rules were tightened.But after the 2008 financial crash, mortgage lending rules were tightened.
As a result, loans should leave more room for prices to fall before borrowers are stuck with negative equity.As a result, loans should leave more room for prices to fall before borrowers are stuck with negative equity.
Most recent borrowers have also had their ability to pay checked against interest rates even higher than the ones we're seeing at the moment.Most recent borrowers have also had their ability to pay checked against interest rates even higher than the ones we're seeing at the moment.
Additional reporting by Jack Rodgers and Helena Rosiecka Data visualisation by Rob England and Jana Tauschinski. Additional reporting by Jack Rodgers and Helena Rosiecka