Is the property market ready for another recession?

Home-owners are worried about the future of the property market post COVID-19. Firstly, take a look at what happened in the last financial crisis.

Photo by Daniel Tausis on Unsplash

What is the GFC?

If you have watched The Big Short, then you probably know about The Global Financial Crisis (GFC) 2008 or lived through it. GFC 2008 was mainly caused by availability of cheap-credit, and significant sub-prime mortgage transactions (mortgages to buyers with low credit-ratings). These borrowers defaulted on their mortgages/loans, house prices declined and it pushed the global financial markets to the brink of collapse.

Average sub-prime borrower pre-GFC

How did things work pre-GFC?

The GFC fundamentally changed the UK property market. Before the GFC, some lenders gave mortgages for 100% loan-to-value (LTV) of the property. It was quite common to secure a house without a deposit, and the gap between income and the value of debt for homeowners became wider and wider. Interest-only mortgages were also commonplace.
Everyone thought that house prices would continue upwards, so it did not appear to be a problem. Interest rates were steady, and house prices continued to rise.

What happened during the GFC?

The era of the 100% mortgage was over, and banks would only consider granting a mortgage if the borrower had a substantial deposit and good credit-rating. Some banks stopped lending generally in 2008, which led to the credit crunch. UK house prices plummeted by 16.2% in 2008, the largest drop in a year. The Bank of England dropped interest rates in 2019 to 0.5% to boost spending. Mortgage applications dropped on average by 25% and for many people looking to buy a house, mortgages were hard to come by.

Too few mortgages meant that many people could not borrow and low demand for houses meant house prices dropped. On the flip side, there was a rising demand for rented properties, and rental prices rose. Tenants found themselves paying higher rent with fewer alternative options.

Cue the redundancies. Layoffs meant fewer people were able to move homes and the demand for property sales further dried up. Unemployment rate rose to 8.1%, no income coming in and homeowners unable to sell their properties; all led to many losing all the money they had invested in a booming property market that no longer existed. Leading to an increase in repossessions. The UK housing market recovered in May 2014 to its pre-credit crunch market level.

The long-term effects on the UK property market

Cash-money baby: Higher deposits required meant that more people relied on the bank of mum & dad. Family members gave an average of £17,500 each to fund 306,000 property deals worth £77 billion in 2016.

Stress-testing mortgage affordability took on a different dimension. Banks go above and beyond in asking for documentation to ensure the property you’re purchasing is affordable.

Stamp duty abolished for FTB: In 2010, stamp duty was abolished for first time buyers (FTB) and the help to buy scheme was introduced in 2013. Stamp-duty for second home-owners was still pretty high, making it much harder to trade-up to a bigger property or buy a second-home.

Interest-only mortgages decreased significantly: Lenders are more worried they would be trapped with large lump-sum of debt if we face another crisis, they might not be in a position to pay it all off.

UK property market outlook post-COVID

The UK economy is expected to enter the worst recession for 300 years due to the COVID-19 pandemic. Combination of stimulus packages (e.g. furlough scheme), low spending, interest rate cuts and significant growth in unemployment overnight means a recession is beckoning.

  • Will we see similar effects of the GFC on the UK property market, post-COVID?
  • Will it take 4 years or longer, before the property market bounces back?
  • Currently due to pent-up demand, the housing market is stable at best. Should we expect this demand to be sustained?

Stay tuned as I will share my thoughts on my next blog-post, providing answers to these questions and much more on what I think the effects of COVID-19 will be on the UK housing market.

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Ade Akindele

Ade Akindele

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My purpose here is to provide you with a different perspective on everything going on in the world. Hit the follow button, I promise you won’t regret it.