The real estate market collapse has already begun.
This week, Nationwide released data confirming that home values had declined for five consecutive months, the longest such run since 2009.
The typical property has lost £15,454 in value (5.6%) from its high in August.
In light of these numbers, many British homeowners are left wondering how terrible the property market fall will go.
Experts predict that the current drop in home prices won't be as severe as during the financial crisis, or the hit to crypto exchanges and stock markets but it will endure considerably longer, precipitating the belief that the only safe investment remaining in the markets is gold investments.
Nationwide data reveals 16 consecutive months of home price declines
As price predictions for crypto and stocks swing into the grey zone, Home prices dropped for 16 straight months during the financial crisis, data from Nationwide shows. Oxford Economics predicts the current downturn will persist for a full year.
As a result of shifts in the mortgage market, the negative effects of rising interest rates will be seen gradually rather than all at once, making Britain's real estate meltdown more protracted.
Even though the downturn will last longer than expected, according to Oxford Economics, prices will still fall by just 12% from their peak to their trough. This is less than the 18% decrease seen between 2008 and 2009.
According to Andrew Goodwin Oxford Economics representative, we can expect the considerably bigger percentage of fixed-rate mortgages currently will constrain and make it less steep and more extended.
A combination of historically low unemployment and a sizable proportion of homes with fixed-rate mortgages has shielded the economy and the housing market thus far.
Mr. Goodwin attributes most of the declines in home prices to individuals being compelled to sell. They may do it if they lost their job or if their house payment became too high.
Recessive reasons for decline
The British mortgage market underwent a radical shift after ten years of historically low interest rates in the wake of the financial crisis, and this has slowed the pace at which prices are falling.
As a result of the low interest rate, there was a strong incentive to lock in. Capital Economics projects that the percentage of mortgage holders on variable rates, which move up and down in reaction to shifts in the Bank Rate, will fall from 71% in 2012 to 15% in 2022.
With the announcement that the Bank of England will begin rising interest rates by the end of 2021, many homeowners have been rushing to remortgage in order to lock in lower rates for a longer period of time.
One reason British home prices have not fallen as rapidly as they have in places like Sweden, where a far larger proportion of mortgages are on variable rates, is the widespread adoption of fixed-rate mortgages after 2008.
Since hitting a low of 2.01% at the end of 2021, the effective rate on outstanding mortgages has been steadily increasing as a result of rate hikes.
Capital Economics projects that it will almost quadruple, from 1.6% in 2019 to 3.9% in 2024.
If the mortgage market had remained the same as it was in 2012, however, Capital Economics predicts that it would have reached 5.17 per cent by the end of this year.
With fewer than one-third of business owners believing they can simply acquire credit, homeowners can't rely on fixed rate packages indefinitely, however. About 1.8 million homeowners will have to refinance at considerably higher rates in 2023 since their terms will have expired.
Forecasted 7.4% of mortgage holders seeking a new loan
In the first quarter of the year, 7.4% of mortgage holders will be in the market for a new loan, and this trend will continue throughout the year.
The cumulative effect of rising interest rates will be seen for a longer period of time due to the steady stream of homeowners abandoning fixed-rate packages.
Mr. Goodwin predicts that borrowers who refinance in 2023 and 2024 will be subject to higher rates for a longer period of time, even after the Bank of England starts decreasing interest rates.
Goodwin adds that the combination of these two issues means that a home market recovery is quite improbable.
It has been suggested by Capital Economics' Andrew Wishart that the widespread use of fixed-rate mortgages may cause the Bank of England to maintain its current interest-rate structure for a longer period of time.
Wishart, Andrew The effectiveness of monetary policy declines, increasing the possibility that interest rates may need to be hiked further or maintained at higher levels for a longer period of time.
One method to compare the two market crashes is by analysing the rate and depth of the price drops. Costs of living being one more.
How high interest rates go and for how long they remain at those levels will determine how affordable mortgages will be in the future.
If the Bank Rate has already peaked at 4%, then by November 2024 the percentage of income required to support repaying on a standard mortgage will have returned to the rate seen in Feb 2022, as predicted by Pantheon Macroeconomics.
However, if the Bank Rate were to climb to a greater peak of 4.5 per cent, home affordability would remain as dismal as it was in 2008 by 2024’s close.
The issue of becoming well also arises. After an initial precipitous dip, housing prices swiftly recovered as a result of interest rate cuts implemented by central banks worldwide.
As the Bank of England fights inflation, it has decided against such a boost this time around.
Royal Institution of Chartered Surveyors member Simon Rubinsohn predicts interest rates will not go back to the historic lows seen after the 2008 financial crisis.
He anticipates that the Bank Rate, even after initial reductions are made, will eventually stabilise around 3%.
This time around, there will be no bouncing back.
Mr. Rubinsohn predicts that the housing market will not see a price or activity recovery anytime soon.
Mr. Goodwin continued: The financial crisis caused a precipitous decline in the economy, followed by a gradual recovery. This whole area is now drenched. If the downturn isn't as severe, the subsequent recovery won't be as strong.