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Housing Market Decline

The pandemic triggered an exponential housing market boom as hybrid working increased global demand for space. Decades of cheap money and pandemic savings led to an explosion in global house prices which have grown their fastest since records began. Bloomberg estimates at the start of 2022 median sales price of US homes was at a record high of $440.3K – a 36.5% increase from 2020.


However, in recent months the situation has changed. As we enter the winter phase of the Ukraine War, we are experiencing the biggest housing market cooling since the 2008 financial crisis.


The Ukraine War’s inflationary pressures have forced central banks around the world to pursue aggressive monetary tightening. The ECB has continually hiked rates for the past 12 months with rates currently standing at 3% but is widely expected to increase by 50bps to 3.5%

on 15th December during Monetary Policy Committee meeting.


These aggressive rates coupled with an overpriced market and tighter lending standards suggest there is more decline to come. Nationwide figures suggest that average housing prices in the UK fell by 1.4% in November.

Source: Nationwide

As a result, homeowners are facing increasingly more expensive and unaffordable mortgages, with rates still experiencing a fallout from Kwasi Kwarteng’s disastrous minibudget which sent gilt markets into turmoil.


Fixed mortgage rates peaked at 6.65% after the budget and with many still remaining high, housing demand is set to remain depressed for some time to come. Homebuyers are facing increasing rejections and tightened restrictions on loans making buying unattractive.


The future outlook for housing looks weak as interest rates are estimated to stay above 5% for all of 2023, thus setting the UK on a downward trajectory similar to that of the financial crisis.


However, Valentina Romei from the financial times highlights a key difference compared to 2008 - the strength of the labour market. This could limit the decline of the market and with luck stop a potential collapse that is materialising.


However, the overall outlook for the UK housing market continues to look gloomy with the Ukraine War showing no signs of a ceasefire, therefore, maintaining high pressures on the Bank of England’s monetary policy.

 

Edited and Reviewed by Tanish Bagga.

 

References/ Further Reading:

https://www.ft.com/content/76e8b499-2381-463d-ac6d-9d3507f150c3

https://www.bloomberg.com/news/features/2022-09-08/why-did-housing-costs-explode-during-the-pandemic

https://www.nationwide.co.uk/news-and-stories/bank-of-england-increases-base-rate/

https://www.fitchratings.com/research/sovereigns/global-interest-rates-rising-faster-than-expected-pivot-unlikely-in-2023-10-11-2022#:~:text=We%20expect%20rates%20to%20remain,through%20the%20rest%20of%202023.&text=The%20Bank%20of%20England%20(BOE,peak%20of%204.75%25%20by%202Q23.

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