UK Housing Market – Cooling Down or Slumping?

Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.

UK Housing Market – Cooling Down or Slumping?

The residential property market in the UK has been burning red hot over the past 12 months, with prices rising by 13% in June YoY. It isn’t difficult to find reasons why prices have been so firm. Pandemic induced measures, listed below, have fanned the flames.

  • Historically low mortgage rates
  • 95% governments backed mortgages available
  • A stamp duty holiday
  • Time available to individuals furloughed to buy and decorate new homes
  • People able to work from home, moving from cities to houses in suburbs and countryside

Together these factors caused buyers to flood the housing market driving average house prices to record highs of £256,000. However, just as financial journalists were pondering the next rise, this week we learned that house price growth during the month of July went into reverse. The July figures were released on Wednesday, 16th September by the Office for National Statistics (ONS) who pointed out that the -3.7% fall recorded is the biggest monthly decline in house prices since 1992. This is an ouch moment for anyone that recently paid top whack- it equates to a hypothetical capital loss of £10,000; based on the average house price figure.

Chart 1: UK Annual Price Growth (%)

The drop in price is mainly attributed to the stamp duty holiday coming to an end at the end of September, with solicitors notifying buyers back in July that sales may not be completed in time to benefit from the exemption.

As with any shift in pricing “winners and losers” emerge. Recent buyers will begrudge the fact that their new home has fallen in value while pending new buyers will see the fall as providing a welcome improvement in affordability. This is especially true for first time buyers who often struggle to get onto the housing ladder.

Will House Prices Continue To Fall?

It is always difficult to predict house price shifts. We know, for example, that the ONS reported a record decline transactions in July. If demand pulls back further, and remains tepid, this will likely contribute to a cooling down of the heated environment in the housing market.

Chart 2: UK Residential Property Transactions Oct 2018 – Jul 2021

Source: Bloomberg, 2021

However, not all participants share the view that house price declines will continue. CEO of, an estate agent comparison website states, “Before we run for the hills at the first sight of a house price decline it’s important to note that the market has been moving at a record pace for a sustained period of time and so a pause for breath is more than natural,”

Mortgage Markets

Despite the price drop, concerns over the accessibility of the property market for younger buyers in the future remain, with affordability (lack thereof) a critical factor. Perenna COO, Colin Bell, is calling for a “new common-sense approach” to mortgage lending”.  With record low mortgage rates, affordability in the future must be considered otherwise when rates begin to increase a healthy market could quickly become stressed.

Various approaches to help guard against this include planning ahead and forecasting monthly repayments under different interest rate scenarios. The existence of more fixed term are also extremely helpful, but generally only for a maximum term of 5 years. Longer term fixed rates would allow buyers to have maximum protection against interest rate hikes but implementing them on a large enough scale is challenging; doing so would play a significant role in curbing defaults and reducing systemic risks.

Concluding Thoughts

Prospective buyers, homeowners and property investors are wondering if this is a bubble popping.

Mortgage lenders would normally be concerned by falling prices, especially on a mortgage at 95% LTV, and start to withdraw. However, the government backing provides security to lenders and is still opening doors to new buyers who previously were priced out by the high deposits required.

Recent transaction levels are at record lows and prices falling, but future demand is expected to significantly outstrip the supply of properties. Therefore, we do not buy the idea that house prices will encounter sustained price declines.

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