What We Can Learn About How Recessions Affect The UK Housing Market

Hello Readers,

Although not official, I think that we all know we are likely facing a significant recession in the coming months.

As the cost-of-living skyrockets, energy bills increase to eye watering levels and the war in Ukraine significantly impacts supply chains, more and more people are starting to adjust habits as the situation rapidly escalates.

Furthermore, the mini budget from Kwasi Kwarteng has shocked markets and devalued the sterling, stoking further inflation and interest rate increase fears. A u-turn on the 45p tax rate was announced and possibly other u-turns are in the pipeline, further adding to the uncertainty and confusion! The chancellor plans to publish a report by the end of this month outlining a plan for growth or funding these tax cuts in some way, so let’s wait and see if this calms markets going forward.

But what of the property market? Is investing in property during a recession a good idea and how is the coming 12-18 months likely to shape up for the property market?

I’m not going to attempt an answer to the second part of this question as if the past few years have taught us anything, it’s that we don’t know anything for certain. Perhaps a good way to answer the question in part, is to look back at how residential property performs as an asset class during a recession.

I’ve been doing a lot of research into property during a recession and without wanting to answer the question before we present the facts, it’s worth highlighting that residential property is one of the strongest investments during recessionary times.

The general headline is that property really does act a bit like a Government bond which is undoubtedly up there with the most stable of investment avenues. An example of this is how, as of the latest data reflecting June’s figures, year-to-date, the property sector has outperformed longer-dated UK inflation-linked bonds.

COVID-19 recession (2020 – 2021)

The COVID-19 recession is arguably something we’re still going through, however after initial warnings of a something like 20% + drop in house prices, initiatives such as the stamp duty holiday saw them rocket.

In January 2020, UK house prices were up by 1.6% annually at £231k and by December 2021, this had increased to 9% or up to £270k.

For Medway, annual house price increases went from -3% in January 2020 to 11.2% in December 2021. On average, values increased by £40k over the period.

Certainly, we are still seeing record interest rate increases, inflation at record levels and now mortgage rates shooting up. However… regardless of this, the past few years have actually been quite good for house prices as mentioned above.

Great Recession (Q2 2008 – Q2 2009)

In my view, we cannot compare the current looming recession to the 2008 – 2009 downturn as the causes are so very different. Led by an international banking catastrophe, the impact to the property market was extremely severe.

During this period, Medway annual house price increases went from 4% in April 2008 to -17.7% in July 2009 (-20.7% at the lowest point), however by May 2010 annual increases hit 15.3%.

Early 1990s recession (1990 – 1991)

The early 1990s recession was caused by the UK savings and loan crisis. In addition, the UK saw an artificial increase because of prospective homebuyers rushing to purchase property prior to the withdrawal of the MIRAS tax relief option in August 1988.

The banks introduced restrictive monetary policies to curb inflation and the end of the Cold War along with the 1990 oil crisis in the wake of Iraq’s invasion of Kuwait contributed to the situation.

Interest rates were high with a drop from 14.8% at the start to 5.9% at the end. This is still high compared to today’s standards!

During this period, there was extremely high unemployment and housing repossessions hit record levels as prior to this as a policy of low interest rates were instrumental in creating a property boom.

Interestingly, this recession caused something of a decade long drop in house prices, with a total fall of 20%. This period was possibly the worst for house price declines on record as the table below indicates.

Early 1980s recession (1980 – 1981)

Argued to have been the worst recession since the second world war, a key event leading up to the 1980s recession was the 1979 energy crisis caused by a disruption to the global oil supply.

This led to oil prices shooting up in 1979 and early 1980 and pushing already high inflation up into double digits.

Somewhat like today’s situation with Russia, however the crisis we are currently in relates to gas supplies and inflation is starting from a much lower base. The 1980s recession saw interest rates hit 17% at the start of 1980 and drop to a low of 9.6% by October 1982.

Interestingly, if you look at house prices there was a minor drop but recovered by late 1983.

Mid-1970s recessions (1973 – 1974 and Q2, Q3 1975)

The mid-1970s recession followed what was arguably the first house price bubble. The recession happened against a backdrop of the 1973 oil crisis, Yom Kippur War and industrial action of coalminers along with railway workers leading to the three-day week.

Economists have likened the current downturn to being the most like this recession, however again the difference is that the crisis is related to gas not oil.

Interest rates fluctuated from a low of 9% in March 1976 to a high of 15% in October 1976. But, what of the property market? The period saw house prices become stagnant due to high unemployment coupled with high inflation.

When looking at house prices, data from the land registry highlights how, at the start of the 70s, average house prices were £3,920 and by the end, they had hit £19,273. This is a significant rise of around 500%!

What Can Property Investors Learn From This?

The first point that stood out as I was going through these different periods was how property prices have recovered and, over time, continued to grow. No business growth is linear and the same can be said of property.

If I were to pick which recession, we would be best to compare to it would probably be that of the 1970s. The political and economic climate is similar and it’s certainly positive to read that the effects of that period were not a dramatic crash in house prices.

Should investors continue to buy? I think there will always be good deals out there, however, a crucial consideration is that if you need to sell, doing so during a recession will probably not get you the best returns.

These are certainly just my thoughts and I’d be interested to hear any comments or observations you may have!


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