How would this affect the London property market and could we see a property price crash?

An unexpected drop in economic growth for the second month in a row has raised fears that UK now faces an imminent threat recession.

GDP now has fell in March and April – by 0.1% and 0.3 respectively – and City analysts have warned that the first consecutive monthly falls since the start of 2020 increase the risk that the economy could contract strongly.

Soaring energy pricemore and more inflationand the war in Ukraine all contribute to the crisis.

While an official recession, defined as two consecutive quarters of decline, could still be avoided, the economic outlook has deteriorated in recent months.

With a year of excitement real estate pricesBritain’s property market has so far seemed unaffected by the storm clouds gathering across the economy.

So what will happen to real estate prices next, and how might that change if the UK were hit by a recession?

Is the UK headed for a recession?

A financial recession that lasts for months or even years is a period of time when the economy declines and affects everything from employment to investment and housing.

The UK entered recession in 2020 due to Covid lockdowns. The economy plunged 20% between April and June 2020 as businesses closed and people were ordered to stay home.

It is not yet known whether the UK will enter another recession, but the country’s leading business group, the Confederation of British Industry (CBI), said that he now believes that economic growth this year will be 3.7%, down from 51% last year.

The organization’s chief executive, Toby Danker, said this week: “Let’s be clear, we expect the economy to stagnate. It won’t take much to tip us into a recession, and even if we don’t, too many people will feel that way.

Could a recession cause house prices to fall?

Typically, a recession is followed by a slowdown in real estate prices. The 2008 UK recession triggered by the global financial crisis led to mass unemployment and a 20% drop in property prices, leaving many homeowners in dire financial straits.

House prices remain extremely high today, but have been artificially inflated by the stamp duty holiday. With the cost of living soaring, inflation rising and the gap between wages and house prices widening, some experts believe it’s only a matter of time before there is a crisis.

But according to Nick Whitten, head of home and residential research at JLL in the UK, the risk of an accident is still low.

Whitten said: ‘Since the Second World War there have only been four occasions when UK property prices have experienced a sustained decline – and on each of those occasions there has been a surge unemployment, which forced many sellers to sell the house they couldn’t. afford more.

“However, unemployment in the UK is currently at 3.8% and the number of vacancies has reached a record high of 1.3 million. We do not expect a crash, but we do expect the price growth will slow to around 4.5% by the end of the year.

The impact on London property

However, Tim Hassell, managing director of central London rental agency Draker Lettings, said he believed there was “increasing risk” of a crash over the next two years, especially in central London.

He pointed out that many homeowners have large mortgages linked to low interest rates, adding: “If interest rates rise more than 1.5% over the next two years, the cost of borrowing will become out of control, which in turn will force people to sell and we will almost certainly see an increase in foreclosures.

He added: “At the same time buyers will have less funds due to the rising cost of living and as such will be less willing or able to buy in a declining market. The UK market is ‘fuelled’ by confidence and as soon as that confidence wanes, the housing market will be negatively affected. »

What will happen to house prices next?

While experts believe the housing bubble is unlikely to burst, many believe the market is calming 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 the most recent house price index showed that while house price growth was still in double digits, it is now decelerating and at its slowest pace since the start of the year.

According to David Ruddock, head of residential operations for Agent Carter Jonas, a slowdown is “inevitable” because 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 a drop in prices, which we do not expect, as demand still exceeds supply for sales and rentals.”

Marc Schneiderman, director of London-based estate agent Arlington Residential, added: “There is no doubt that market sentiment is shifting towards a much more cautious and largely negative view of what lies ahead. It is clear that interest rates will continue to rise, which will complicate the process of buying a property and we will see fewer people able to borrow large sums, which will reduce market activity and, therefore, demand for properties as well as values ​​will increase. be diminished.