The Bank of England has pushed through the biggest interest-rate hike in 27 years as it warned the UK is heading for more than a year of recession.
Interest rates have been raised from 1.25% to 1.75% - the highest level since January 2009 – with inflation expected to peak at 13.3% in October.
Some of the fundamental ways a recession can have an impact on the housing market are listed below.
What is a recession and what happens to house prices during it?
A recession is a significant, widespread and prolonged downturn in economic activity.
A general rule is that two consecutive quarters of decline in a country’s Gross Domestic Product (GDP) results in a recession.
Economic downturn can have a negative impact on the value of houses but this is not a blanket statement that can be applied to every property.
During a recession, it is possible to see an increase in the rates of foreclosure, flat or declining property values and houses staying on the market for longer before they are sold.
The key thing when it comes to either buying or selling houses is that the property market will carry on regardless whether you decide to enter it or not, so it’s really a case of considering your own personal circumstances and figuring out what is best for you.
What are the difficulties of buying a house during a recession?
Homeowners may find it more difficult to sell their current house in order to buy a new one.
A recession can mean that the overall value of houses fall and so it may mean considering keeping a house for a while longer before moving on.
Recessions are often accompanied by rising unemployment and lower household income which means that borrowers can have difficulty making sure debts are covered.
In turn, this means lenders respond with caution when it comes to issuing new loans.
This may mean loan applications are heavily scrutinised, the minimum credit scores required to qualify for loans may increase or the down payment requirements on certain loans, including mortgages, increasing.
Are there any advantages of buying during a recession?
As a response to reduced spending and slower economic growth, interest rates can decrease which can lead to lower mortgage rates.
This, in turn, lowers the total cost of purchasing a home over time.
House prices in general may also lower as, going by the law of supply and demand, fewer buyers means the cycle of trying to sell a home becomes less appealing.
This isn’t ideal for people looking to sell in a hurry for financial reasons or because they want to move elsewhere fast so they may be willing to accept offers below their asking price.
When was the last recession?
The last time the United Kingdom entered a recession was at the height of the Covid pandemic in August 2020.
Due to people isolating themselves and staying at home, many businesses were forced to close whilst others lost their jobs.
GDP at this time fell by 20.4%.
