14 Reasons Not to Fear House Price Drops

The property market experienced a boom nationwide between the summer of 2020 and late summer of 2022, fuelled mainly by pandemic-induced trends such as the stamp duty stimulus, low mortgage rates, the race for space, and the rise of remote working. 

2023 has presented a different story for the housing market so far, with cooling demand, rising mortgage rates, and declining home sales from the previous two years. 

Many homeowners are now concerned about a possible fall in property prices, as the newspapers predict a housing recession. Nonetheless, there are several reasons why homeowners should not fear house price drops. 

This article explores 14 key factors that can provide reassurance in uncertain times.

1.     Strength of the Job Market

The job market is crucial in determining home prices, directly impacting income levels. Fortunately, the Manchester job market remains robust, with unemployment hovering near all-time lows of just 3.6%. Labour shortages are currently a more significant concern than a lack of job opportunities. As long as the job market remains stable, home prices should be firm and prevent substantial house price falls.

2.     2023 is Different to 2008

Comparing the current housing market to the 2008 Credit Crunch reveals significant differences. The housing bubble that led to the crisis was primarily driven by subprime mortgages in the USA, resulting in a wave of defaults. This spread to the UK, and banks stopped lending to each other (and mortgage borrowers). 

Today's property market differs significantly for four reasons.

Firstly, homeowners have built substantial equity in their properties since 2008. Secondly, many homeowners with a mortgage have taken advantage of re-mortgaging at lower fixed rates during the pandemic meaning they are immune to the recent hike in interest rates. 

Third, the banks are prepared to lend money, unlike in 2008 when there was a severe lack of credit as banks weren’t prepared to lend money. Finally, the Bank of England in 2014 told lenders to stress test every mortgage application up to 6% or 6.5% mortgage rates. These four points have reduced the threat of widespread defaults, even if the UK economy were to enter a recession.

3.     The Long Game of Homeownership

Most homeowners view their household as more than a house; it's a home. It’s more than just a financial asset; the home represents a lifestyle choice. Despite potential house price declines over the next few years, homeowners' long-term perspective should remain intact. Throughout British history, home prices have always appreciated over time, even after the financial crisis of 2008. 

Homeowners who held onto their properties during the Credit Crunch eventually saw house prices return to their pre–Credit Crunch 2007 peak by July 2015.  It’s so easy to fixate on the short term and forget the medium to long terms gains made by property.

4.     Inflation is Good News for Homeowners and Landlords

While inflation may be a cause for concern in various aspects of daily life, it can benefit most homeowners, and landlords. Inflation often leads to increased house prices and reduces any mortgage's 'real' value, thus acting as a hedge against rising costs. Higher wages resulting from inflation will improve affordability, thereby supporting home prices. The key is avoiding inflation leading to a full-blown recession, which could negatively impact the housing market.

5.     Positive Implications for Going Upmarket

A national home price decline can be good news for homeowners looking to move up to a bigger or more expensive property. Such a decline would reduce the price gap between selling their home and purchasing the next one. 

For example, if you were planning to move from a £300,000 home to a £500,000 home today, excluding moving expenses, it would cost you an additional £200,000 to move home.

Let's say, for example, house prices dropped by 10%, the £300,000 house would be reduced to £270,000, and the £500,000 house would be reduced to £450,000, meaning the gap between the two would only be £180,000 – thus saving you money!

6.     Persistent Housing Shortage

The national housing shortage, which originated during the financial crisis when homebuilders scaled back construction, remains a significant factor in supporting home prices. Analysts estimate that the market needs to add around four million new homes to meet current demand fully. Given the cooling of the market and rising mortgage rates, homebuilders are still cautious about increasing construction. As long as the housing shortage persists (which it will without an additional 2 million homes being built), it should help sustain home prices.

7.     Rental Market Dynamics

Soaring rental prices, another consequence of inflation, are another reason for homeowners to be content with their current ownership status. Homeowners with fixed-rate mortgages enjoy the stability of locked-in monthly mortgage payments. In contrast, renters face challenges with rent increases of 10% or even 20% per annum on new properties coming onto the market (some types of properties) due to the ongoing lack of properties to rent. The rise in rental prices is encouraging more people to consider homeownership, maintaining demand, and supporting property prices.

8.     Anticipated Mortgage Rate Reduction

While recent rate hikes from the Bank of England have affected the housing market, there is an expectation of easing in the near future. According to the money market's latest forecasts based on the 5-year swap rate, the Bank rate is projected to fall in early 2024. A decline in the Bank of England rate would lead to a decrease in mortgage rates. If the economy remains stable during that period, declining mortgage rates could support house price growth.

9.     Expected Moderate Decline

Economists generally predict that any potential home price decline will be modest. With the current support from the housing shortage, inflationary trends, and well-capitalised mortgage owners, a moderate single-digit decrease is more likely than a severe crash like 2008. Such a moderate decline should be less intimidating for homeowners.

10.  Potential for Renovation Costs Dropping

The demand for home improvement during the pandemic led to a surge of 41.9% in construction materials in the two years after lockdown. However, in the last 12 months, overall building costs have fallen by 1% (despite inflation). Some notable drops include timber dropping 27.6% over the previous 12 months, although cement is up 13.7%. Price reductions in new construction might lead to even more easing of renovation costs. The trajectory of renovation costs will depend on the housing market and broader economic conditions.

11.  The Property Market Loop of Recovery

If home prices were to fall, it would likely be driven by weakened homebuyer demand rather than an oversupply of homes. Such a decline would indicate an economic slowdown or recession, prompting the Bank of England to respond with interest rate cuts. Lower interest rates would subsequently reduce mortgage rates, giving homebuyers a boost in affordability and ultimately contributing to the market's recovery.

12.  House Price Drops Only Affect You if You Sell

A decline in home prices might psychologically impact homeowners, even though it may not affect them directly if they do not plan to sell soon. House prices can only affect you if you are moving. 96.54% of homeowners will still be in their homes in 12 months, so they won't lose money if the property market dips. Price change only affects those looking to buy and sell. Don't be held hostage by market trends - know when to buy and (just as importantly) when to sit tight.

13.  Actual Value of Homeownership

The pandemic has brought heightened attention to the value of homes, with widespread discussions on the housing market and price speculations. However, homeowners' connection to their homes goes beyond financial considerations. It is often rooted in the relationships shared with loved ones, the sense of community, the peace of mind derived from home ownership, and the efforts invested in the property. The true value of homeownership transcends mere monetary figures.

14. The Rarity of Prolonged Price Declines

Prolonged home price declines lasting five-plus years, especially those as severe as the early mid-1990s-era housing bust, are infrequent. Throughout the last century, national home prices have only declined occasionally and typically required unique combinations of events. While recent price surges have led to speculation about a potential decline, numerous market tailwinds and the reasons above should prevent a sharp plunge and potentially avert any significant house price crash.

But What if House Prices Do Drop?

Ignoring the 14 points mentioned above, let us see what a price reduction would mean for homeowners.

If house prices dropped by 10%, let’s say, they would still be at a greater level than in August 2021 … and nobody was complaining about those!

Now, don't get me wrong, if house prices drop by 10%, a tiny percentage of homeowners (2.83% of all homeowners that have bought in the last two years) will be in negative equity. 

However, that is only an issue if they decide to sell the property, and as we all know, homeownership is a long-term thing, and most of those who would have negative equity will probably be on five-year fixed-rate low-rate mortgages.

But what if house prices dropped by the same percentage as they did in the global financial crash in 2008? If that were the case, house prices would only return to the house price levels achieved in the summer of 2020 (although the number of people in negative equity would increase slightly)

As homeowners face uncertainty regarding potential house price drops, it is crucial to recognise the various factors that support the housing market's resilience. While economic conditions can fluctuate, history has shown that housing values tend to appreciate over the long term. 

Homeowners can take comfort in the differences between the 2023 market and the 2008 housing bubble, including stronger equity positions and a more regulated lending environment. 

As we navigate through market cycles, homeowners should remain focused on their long-term goals, the strength of the job market, and the true value that their homes bring beyond monetary considerations. By acknowledging these factors, homeowners can confidently approach potential price declines and adapt to the market.

These are my thoughts, what are yours?