As the prospect of the UK entering a recession grows every day, for those in the mortgage sector, the big question is what impact will it have on the property market?
The latest figures from the Office for National Statistics (ONS) show gross domestic product (GDP) contracted by 0.1% in Q2, making a recession – defined as two consecutive quarters of negative GDP – increasingly likely by the end of the year.
Unlike the recession of 2008 however, this latest economic downturn has not been caused by a failure in the banking system and is not directly linked to the mortgage market. Nevertheless, recessions still traditionally have a detrimental effect on the housing market and quell buyer appetite.
So, what will a recession bring? Unemployment usually goes hand in hand with a recession, with the obvious concern being a homeowner’s inability to meet their monthly mortgage payments in the event of them losing their job.
If we look at the latest figures from the ONS, employment is strong, with the UK unemployment rate currently at just 3.8%. This compares to over 5% in 2008 and 8.4% in 2011. The number of job vacancies is also very high, with 1,274,400 vacancies between May and July this year – compared to just 642,000 during the same period in 2008.
The picture is not so positive when we look at wage growth. Although the average total pay (including bonuses) grew by 5.1% in Q2 and regular pay (excluding bonuses) by 4.7%, when adjusted for inflation, in real terms, total pay fell by 2.5% over the year and regular pay fell by a record 3%.
Wage growth is unlikely to catch up to inflation anytime soon and as utility bills – and just about everything else – continue to rise, there will be some borrowers who will undoubtably struggle to meet their monthly payments.
Even in a worst-case scenario however, the large array of regulatory measures, stress testing and lender forbearance that was introduced post-credit crisis should keep considerable numbers of repossessions at bay.
We are also unlikely to see anything close to the drop off in lending that we saw during the last recession, when residential property transactions fell to just over 800,000 in 2009.
UK Finance is predicting gross lending of £281bn in 2022 and £313bn in 2023, with just under 1.2 million residential property transactions in 2022 and 1.1 million in 2023. Even in the midst of a recession, this is not unachievable.
As disposable incomes are squeezed, one consequence is likely to be a strong remortgage market as borrowers look to secure the best rate and lowest repayments.
We may have seen some recent repricing of mortgage rates and temporary withdrawals due to overwhelming demand but on the whole, lender appetite is strong – with nothing to suggest at present that this will dampen anytime soon.
Nonetheless, it seems implausible that the reduction in borrowers’ disposable income alongside a rise in interest rates will not have some impact on the homebuying market. For first-time buyers, saving for a deposit may be put on hold as the cost of living increases. Homemovers may also be reluctant to make a foray up the housing ladder due to economic conditions.
The latest Halifax House Price Index shows month-on-month prices fell 0.1% in July – the first fall in a year. This is unlikely to be the last monthly fall we will see over the next twelve months. Yet while we may see a flattening of house prices we are unlikely to see any substantial falls: The severe lack of supply versus demand should ensure the homebuying market and house prices keep a steady pace.
Of course, it is early days and as we all know, things can move quickly in the property and mortgage markets. It is still in many ways a guessing game as to what the recession will bring. No sector is recession-proof but for the mortgage market at least, the economic downturn should not lead to a repeat of 2008.
Simon Jackson is chief executive officer of MSS
