JLL has issued its latest UK house price forecast, predicting that the housing market is set for a correction, rather than a crash, as mortgage borrowing costs rise.

The company highlights that in the last 15 years, the UK has seen property prices reach new highs on the back of a period of record low borrowing costs. Never prior to 2008 had the UK base interest rate dipped below 2%. But in the period since the Global Financial Crisis (GFC) it has averaged 0.5% and hit a low of 0.1% during Covid.

However, JLL says that events of the past year, and more so the past six weeks, have led to a growing set of predictions that a UK house price crash is now imminent.

A spike in borrowing costs – and an anticipated further steep rise in mortgage rates – alongside continued high inflation, the cost-of-living crisis and an impending recession have prompted predictions from the most bearish forecasters of 20% to 30% fall in UK house prices, according to Marcus Dixon, director of UK residential research at JLL.

But he points out that these predictions fail to recognise that UK house prices have never fallen by more than 20%. And this prompts a question of whether the underlying market prospects are truly worse than the two previous crashes – the early 90s recession where house prices fell 20% cumulatively between 1989 and 1993 and the GFC where prices fell by 15% between Jan 2008 and May 2009.

He explained: “In the early 90s, inflation was high [like today] and GDP was low and falling into negative territory [like today]. But, a key differentiator was that unemployment was extremely high at circa 10% in the early 1990s – today it is at a record low of 3.5%. And while unemployment is expected to rise in the coming 18 months, it is expected to hit 4.9%, below the average of 6.7% since 1971 and the past 10-year average of circa 5.2%.

“Meanwhile, the GFC was fundamentally a credit crisis built on poor lending practices through the early 2000s which saw people with poor credit history and no equity lent sums of money they could ill-afford to repay. Ultimately the ‘house of cards’ collapsed, banks failed, millions lost their jobs and people were forced to walk away from mortgages they could never afford in the first place.

“In the period since, lending practices have been tightened significantly – and the housing market is now built upon much stronger foundations.”

JLL analysis of the Bank of England Mortgage and Lending Report found that 62% of the UK’s 8.4m mortgaged owner occupier households have at least 25% equity in their house. Another 34% have between 10-25% equity and 4% have between 5% and 10% equity.

Just 0.2% or circa 17,000 owner occupied households in the UK have less than 5% equity – and, statistically at least, there are no households with zero equity. Meanwhile, more than 95% of the circa 3m UK buy to let landlords who own with a mortgage, own at least 20% in their property.

But ultimately the amount of equity the UK’s homeowners possess only tells half of the story.

Dixon continued: “An era of cheap borrowing is ending and mortgage affordability is about to become squeezed. However, mortgaged households in the UK have the highest incomes by tenure – averaging £80,000 per annum.

“Before the recent rise in UK interest rates, the average household income spent on a UK mortgage was equivalent to 18%. With the average two-year fixed rate mortgage cost having risen to circa 6%, that income to mortgage expenditure percentage has risen to circa 27% – the level it was around the time of the Global Financial Crisis. And if mortgage rates hit 7%, the average household income to mortgage cost ratio would hit 30% – the rate it was in the early 1990s.

“But merely spending 30% of a household income on housing costs is not a reason to assume a collapse into distress. With low unemployment and the highest average incomes, the UK’s mortgaged households have a more stable financial footing than the GFC or the early 1990s recession.”

Dixon believes that the vast majority should be able to ride out a squeeze on their household incomes avoiding the need to sell their home to make ends meet. But it will be a further extension of the current cost of living crisis.

Circa 1.1m households were on the current Standard Variable Rate coming into this recent rate rise.

Another 1.2m households will come to the end of their fixed term over the next year. JLL calculates that those 2.3m households combined will be spending an additional £8bn on mortgages by Q4 2023. This could ease some of the current high inflation, but it could also hamper GDP growth.

He added: “The customers spending that extra on their mortgage would perhaps most likely be transferring that from their previous savings/investment allocations or from their typical discretionary spend on food, leisure and entertainment.

“Furthermore, banks currently have a low appetite for repossessions. In the early 1990s, banks repossessed circa 100,000 homes per annum. In the GFC the rate was about 50,000 per annum.

“Currently there are about 4,000 repossessions per annum which out of the UK’s circa 11m mortgage properties represents a rate of about 0.04% per year. It takes two years to repossess a home – and in the current cost of living crisis, it could be a difficult public profile position to be seen to be adopting a repossession strategy.

“However, banks are a regulated entity so they cannot turn a blind eye to customer defaults. But there are other options that can be explored such as tracker rates or interest only periods and it is highly likely banks will exhaust all these options before pursuing a route of foreclosure.”

Ultimately, JLL expect that there will be far less distress in the market as there was in previous crashes – as long as there is no sharp rise in unemployment.

However, the company does expect to see a steep fall in UK housing transactions.

He said: “The number of First Time Buyers (FTBs) before the GFC typically totalled 400,000 per annum out of a total of circa 1.5m annual transactions.

“Post GFC, FTBs fell to 325,000 and total transactions to 1.2m. JLL predicts there will now be circa 200,000 viable FTBs with sentiment among aspiring homeowners taking a hit, mortgage affordability becoming stretched to new homeowners and the ending of help to buy, which typically helped circa 50,000 FTBs onto the ladder per annum. This cocktail of transactional headwinds will see overall transactions fall to circa 1m in 2023.

“The transactions that do occur will be dominated by slightly more motivated sellers [but not financially distressed] faced with a higher proportion of ‘opportunistic’ buyers [such as cash buyers who will account for about 25% of all transactions, up from the current 18%]. These opportunistic buyers will not expect to pay asking price. But the vendors who are not distressed will only accept a fall in values to a certain level – i.e., more of a discount than a fully blown correction and certainly not a crash.”

JLL believe that this dynamic will create a sluggish market in which buyers and vendors haggle over price and ultimately less transactional activity occurs with the supply of new homes for sale gradually becoming constrained.

Against this backdrop, JLL is forecasting that UK house prices will fall in value in 2023 by 6% which equates to an average discount of £17,500 from the average UK house price of circa £290,000.

Of course, as in any market, there will be winners and losers. Not all types of home, cities or regions will be impacted to same level.

Dixon went on: “On a regional level JLL’s forecasts falls ranging from circa 4% across Greater London to around 8% in Wales, the North East and Yorkshire & the Humber.

“However, in many of the housing supply constrained UK city centres, where there is a greater concentration of equity rich buyers, price growth is still expected.

“Ultimately new housing supply is expected to fall even further behind target as a result of the tightening market conditions.”

JLL forecasts that there will be a national shortfall of 610,000 homes over the next five years alone – up from JLL’s previous expectations for an already stark shortfall of 500,000 homes.

In London private new home starts are forecast to average circa 16,000 per annum – well below the Greater London Authority target for 52,000 new homes per annum.

As far as the rental market is concerned, the current supply demand imbalance across the UK rental market looks set to endure as fewer households move across into owner occupation and demand for rental properties increases further.

Dixon concluded: We expect that prospective buyers, as well as those who would under normal circumstances have transacted under Help to Buy, will remain in the rental market. This adds further fuel to an already constrained rental market and will, we expect, mean the supply demand imbalance and resulting rental growth will continue.

“Rental growth is expected to be particularly strong at the front end of the five-year period before falling back in line with historic norms of circa 2% – 3% as inflation is brought back under control.

The outlook for investors is mixed. Demand for rental properties looks set to continue, and forecasts of rising rents and falling prices suggest we could see a rise in yields across the board. But the cost to service debt will remain a key issue for more highly indebted landlords.

“The purpose-built UK BTR sector is expected to outperform the wider UK rental market in terms of rental value growth.”

House price growth slows sharply, new data shows