The prospect of a house price crash is something that’s often been reported in the media over the last year or two. It’s still something that could happen. Although on balance most commentators seem to believe that it won’t. It might still be interesting to consider, however, what might happen if there was a house price crash this year. Could cheaper property prices actually be a good thing?
Let’s take a look at how a house price crash could affect different groups within the housing market.
The impact on first time buyers
First time buyers could potentially be big beneficiaries from a house price crash. They would pay less for their first home, and only need a smaller deposit. More people would be able to afford to buy, including those who had given up all hope of home ownership. Generation rent would have more of a chance of becoming generation buy.
This might not be as straightforward as it looks however: In times of house price falls it’s never clear how long and how far they might fall. First time buyers might be reluctant to buy. Lenders might be reluctant to give mortgages.
The impact on property investors
Some people might think that a house price crash would serve property investors right. That they deserve to suffer losses instead of making the big profits they hoped for.
Property investors could potentially be big beneficiaries from a house price crash however. Buy to let investors would be able to buy up property at bargain prices and enjoy very good yields. A crash in the housing market could mean even more demand for rented accommodation – which is in very short supply already. Rents could soar.
Developers would be keen to buy up land and property at bargain prices for future use. But they would be unlikely to develop it during a crash, which could worsen the housing shortage.
Foreign investors and other foreign buyers would almost certainly be very keen to take advantage of a UK property price crash. If the price crash came hand in hand with a recession and a fall in the value of the pound, foreign investors would be even more likely to jump in.
The impact on homeowners
How homeowners would fare in a house price crash is very difficult to judge. It very much depends on their personal situation.
Homeowners who bought some years ago probably wouldn’t be affected too much. They might feel a little less wealthy but their home would still be worth more than they paid for it. Those who now own their home outright would be affected even less.
Those who have bought more recently could be in a more difficult situation, especially if they have a large mortgage. They could find themselves in negative equity, where their home is worth less than they owe on it. They would be unable to remortgage at the end of a fixed term deal, or remortgage to a better deal. If they are unable to keep up their mortgage repayments they could face repossession. Even if they can, some might decide it is simply not worth keeping on paying the mortgage.
But the impact could be limited
Perhaps the most interesting thing here is that, as prices have risen so fast in just a few years, the numbers of property owners who would be affected by a house price crash in this way could potentially be quite small.
Although there are different ways of analysing it, and not all regions are the same, this report says that house prices in England have increased by 27.7% since Covid (and 38% since the Brexit referendum). So if a house price crash saw prices fall by no more than 27.7% (and even the worst predictions are little more than this) then only those who have bought in the last three years would potentially face this situation. This contrasts very sharply with previous house price crashes where prices rose slowly for many years before a crash and so affected many more people.
More winners than losers?
At the end of the day, although it doesn’t seem to make sense, there could be more winners than losers from a house price crash. Prices have risen so fast and so high in recent years that it’s unlikely that any crash would do more than wipe out very recent gains leaving many people relatively unscathed. A crash would reset the market to some extent, and actually create many opportunities for new buyers and investors going forward.
It is clear that house price rises over recent years are pretty much unsustainable and few people would welcome any further significant rises at the moment. But it hardly seems wise to say that a crash would be a good thing either. A far better scenario – and it does not seem unlikely at the present time – would be for house prices to stay stable for a couple of years, so giving incomes some time to catch up.