Could a UK house price crash destroy the FTSE in 2023?
The FTSE has made a promising start to the year, defying the doom-mongers who thought 2023 would just go from bad to worse. Yet there is a big shadow hanging over the economy as analysts warn the UK could suffer a full-blown house price crash this year.
Halifax has predicted a drop of 8% over the next year, while Capital Economics forecasts a 12% meltdown, with a worst-case scenario of 20%. Today delivered gloomy figures from the Bank of England, which showed net mortgage borrowing falling from £4.3bn in November to £3.2bn in December.
Let’s not panic yet
If that happens, it would come as a real blow to domestic morale. Falling property values make tens of millions of homeowners feel poorer. Those who have bought in recent months could be plunged into negative equity, where their home is worth less than they borrowed to buy it.
Falling sales would have a knock-on effect on a host of related sectors, everybody from plumbers to electricians to kitchen fitters and sofa sellers. The big banks could be hit by a wave of debt impairments, forcing them to repossess properties in a bid to recoup their lending.
A house price crash is bad news for housebuilders, as it hits demand for new-builds, drives down sales prices, and punches holes in their forward order books. That explains why Barratt Developments now trades at just 5.51 times earnings, while Taylor Wimpey trades at 6.41 times, and Persimmon at 5.72.
The last 12 months have been tough on their share prices. Barratt and Taylor Wimpey are down 24.47% and 21.15%, respectively, while Persimmon has plummeted 39.77%. House prices may not have crashed yet, but house building stocks have.
I acknowledge the dangers, but reckon that the chances of a full-blown house price crash have been overstated. Mortgage rates rocketed after former Chancellor Kwasi Kwarteng’s disastrous mini-budget on 23 September, terrifying borrowers.
The FTSE can survive this
Yet figures published yesterday by mortgage broker L&C show average two-year rates have now fallen from a peak of 5.90% in November to 4.67% today. Five-year fixed rates have plunged to 4.32%, easing the pressure on borrowers and housebuilders, too. Shares in Barratt and Taylor Wimpey are both up 20% over three months. Persimmon’s recovery will take longer.
The Bank of England is expected to hike base rates to 4% on Thursday, but mortgage rates may not increase by as much as that. Most banks reckon that interest rates are near their peak and may even start falling by the end of 2023.
As mortgage costs fall and property becomes more affordable, buyers should creep back into the market.
Given that property is still in desperately short supply for the UK’s booming population, I believe demand could hold up better than we all expected just a few weeks ago. Anything could happen, of course, but if I’m correct, the outlook could brighten for the UK economy, the FTSE in general, and housebuilding stocks in particular.
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