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What is happening to house prices and could there be a crash? What is happening to house prices, and could there be a crash?
(about 2 months later)
House prices have fallen in recent months, with increased interest rates making mortgages more expensive and high inflation reducing people's spending power. House prices have fallen in recent months, as rising interest rates have made mortgages more expensive, and high inflation has reduced people's spending power.
However, although Bank of England interest rates have gone up for the 10th time in a row, some mortgage rates have started to fall. But mortgage interest rates may be stabilising. How might this affect house prices?
What is happening to house prices around the UK?What is happening to house prices around the UK?
In 2021 and for much of 2022, prices rose steeply - by about a quarter - across most of the UK. Prices rose steeply - by about 25% - across most of the UK from the start of 2020 until Autumn 2022.
The pace of growth was much faster than was seen during the recovery after the 2008 global financial crisis. But they have fallen by more than 4% from that peak, according to March's figures from the Nationwide Building Society.
However, figures from Nationwide and Halifax show consistent falls in the last five months. These figures, which take seasonal peaks and troughs into account, show the largest fall in Scotland and the smallest in the West Midlands.
The chart above shows that year-on-year growth is heading down towards zero. Those recent changes build on very different patterns of growth over the last 15 years.
Nationwide warned the housing market looked set to "remain subdued" in the coming months. Northern Ireland's house prices have still not returned to the levels seen before the 2008 global financial crisis.
You can use the chart below to compare what's happened to house prices in different parts of the UK. In contrast, London and the South East saw prices recover quickly up until 2015, then saw less growth during the race-for-space period of the pandemic, which saw many people relocate to cheaper areas.
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.
Big jumps in interest rates have put pressure on the amount people can afford to borrow.
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 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 in 2022 than in the 12 months leading up to last summer's surge in prices, before the temporary stamp duty reduction ended. Asking prices have not fallen far enough to balance the increased cost of interest rates, so first-time buyers are unlikely to find buying a house more affordable in the short term.
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. In the longer run, if wages increase faster than house prices recover, housing will become more affordable.
Some homeowners will find higher these monthly payments unaffordable, making them more likely to sell. Those longer term trends also depend on whether housebuilding keeps up with demand.
First-time buyers may find properties are more affordable, allowing them to get a foot on the ladder - assuming they can get a mortgage. What has happened to the government's housebuilding target?
But a drop in prices can also send shudders through the finances of homeowners who are staying put. Will house prices crash?
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. The UK's largest lender, Lloyds, is planning for a 7% fall in 2023.
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. In March, the Office for Budget Responsibility (OBR), which advises the government on the health of the economy, predicted that house prices will drop by 10% over the next two years.
Less spending can make an economic slowdown even worse. That would be about half the size of the fall seen during the financial crisis of 2008 and put prices back to where they were in autumn 2021.
But predictions are very uncertain.
Interest rates may stabilise.
The rates offered for fixed-rate mortgage deals have come down from their peak, and experts hope that the rate that sets the cost for trackers or variable rate mortgages may also be at or close to the top.
How high could interest rates go?
Why are prices rising so much?
But interest rates are still higher than they were a year ago, and that has affected the market.
A small uptick in the number of new mortgages in February did not undo the sharp falls seen at the end of 2022.
About 100,000 households come off a fixed-price mortgage each month. They will be hit by new, higher rates.
Some homeowners may find their new monthly payments unaffordable, making them more likely to sell, possibly pushing prices down.
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. The Financial Conduct Authority believes that there are more potentially "financially stretching" mortgages in London and the South East than in the rest of the country.
Payment difficulties can lead to banks and building societies repossessing houses, although lenders try to avoid this. Loans in the south tend to be very high compared with borrowers' incomes. This can make the loans difficult to repay when mortgage rates rise or inflation bites.
More than 200,000 properties were repossessed in the five years after the 2008 crash. This analysis is one way to look for potential areas of weakness in the market.
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. But it doesn't guarantee that people in these areas will fall behind on their mortgage payments.
Most borrowers in recent years have had their ability to pay checked against higher interest rates than the ones we're currently seeing.
Lending rules were tightened after the 2008 crash to help ensure people were better prepared for a more difficult economic climate.
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? Fortunately, the number of people behind on their mortgages did not rise significantly in 2022 and was still at half the 2008 level.
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. The number of repossessions in 2022 was also less than a tenth of what was seen in the years after the crash.
How high could interest rates go? The amount people can spend of their mortgage also depends on wider cost-of-living pressures: on energy bills, wages and job security.
Why does the Bank of England change interest rates? And these factors can all change significantly.
After the mini-budget, financial markets were forecasting that the Bank of England's interest rate would rise above 6% in 2023. The future of house prices depends on the economy as a whole, and that picture is also uncertain.
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.
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.
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.
Data visualisation by Rob England and Jana Tauschinski. Additional reporting by Jack Rodgers and Helena RosieckaData visualisation by Rob England and Jana Tauschinski. Additional reporting by Jack Rodgers and Helena Rosiecka
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