Will there be a housing market crash in 2023?

With just an 8% chance that house prices will drop this year, an all-out housing market crash is almost impossible

There is widespread concern that recent economic struggles are destined to result in a housing market crash, resulting in homeowners seeing their investments depreciate in value and perhaps even forcing some into negative equity. But a deep dive into historic house price data suggests that the expected crash is, in fact, highly unlikely to happen.

In the last couple of years, UK house prices have hit extraordinary highs. It all started with the COVID-19 pandemic and the nation’s subsequent lockdowns.

Why did the UK government introduce the Stamp Duty Land Tax?

To avoid the entire and economy grinding to a halt, the UK government introduced the Stamp Duty Land Tax (SDLT) holiday, which provided a significant tax break for homebuyers and thus kickstarted a rush on the market.

As a result, buyer demand hit incredible highs while supply remained stagnant. The result was an inevitable and extraordinary level of sustained house price growth.

While high prices bring troubles of their own, such as excluding many first-time buyers from a competitive and expensive market, there is now real concern that recent economic troubles, not least the cost of living crisis, are going to result in prices crashing in 2023. It is said that, for property owners, this would be a catastrophe, obliterating the value of property assets and forcing many into negative equity – paying for a mortgage that is worth more than the house they live in.

To better understand the likelihood of such a crash and what it would mean for individuals and the wider UK economy, easyMoney has dug up 50 years’ worth of house price data to see if history can teach us anything about what is about to happen.

In doing so, they discovered that a significant house price crash is highly unlikely.

By analysing annual house price changes since 1973, it is revealed that the UK property market has registered a negative rate of house price growth on just four occasions, or 8% of the time. For the remaining 46 years, prices have increased.

Historic drops in the UK housing market

It will come as no surprise to learn that the largest of these four price drops came in the wake of the 2007/08 financial crisis when overzealous mortgage lending resulted in the collapse of the global banking industry.

In January 2008, the average UK house price was £185,782. By the end of the year, this had fallen to £160,954 (December), a -13.4% reduction in just 12 months. Such a drop had never been seen before, and has never been seen since. When considering whether such a drop is likely to happen again, it’s vital to acknowledge that today’s economic troubles are small fry compared to those of 2008.

The second-most notable decline came in the wake of the financial downturn of 1992, when, between January and December, house prices fell by -5.8%.

The third and fourth drops came in 1990 and 2012, but with declines of -0.6% and -0.2% respectively, they went largely unnoticed by the average homeowner or house buyer. What’s more, these annual declines were more than made up for with positive growth in the following years.

A return to normality for UK housing

All of this is to say that the UK’s housing market is a remarkably secure entity, a total housing market crash is extremely unlikely. Investments so rarely lose value – certainly during the typical ownership life cycle of five to seven years – and recoveries are so quick, that the risk is almost negligible.

Owners are far more likely to see their investment gain value. And these gains have the potential to be much more significant than any losses. Take, for example, 2002’s increase of 28.8%, or 1988’s 27.5% rise. Similarly, during the peak of the COVID-19 pandemic – January 2020 to December 2021, they rose by 14.4%. All of these figures surpass even the most significant historic price drops.

In those years when prices have increased the most, there is a common theme of cheap borrowing facilitated by low-interest rates. We are currently in an unfamiliar situation in the UK where, after a drawn-out period of remarkably low-interest rates, they are now rising and borrowing is becoming more expensive. As such, prices are bound to suffer.

But, the historic data shows that if 2023 does bring a price drop, it is likely to be both minimal and a fully expected levelling off after two pandemic years of extraordinary growth and activity.

In other words, of all the many things that we can justifiably be worried about in 2023, a housing market crash needn’t be one of them.

Commenting on the findings, easyMoney CEO, Jason Ferrando, said:

“Over the last fifty years it’s fair to say that the performance of the UK property market has been quite remarkable.

“It’s not just the positive growth seen but also the consistency of this growth year in, year out, that has made real estate a very low-risk area of investment.

“In fact, it seems that nothing short of a cataclysmic economic downturn is required to bring about a reduction in property prices and even these periods of negative growth are short-lived.

“So while the market may be currently subject to a great deal of fear-mongering due to a monthly reduction in the rate of house price growth, it’s highly unlikely that come December this year property values will have dipped below their current levels.”

This piece was written and provided by easyMoney