House prices could fall 16% according to a new report by the Bank of England. That's a similar fall to the 2008 housing crisis.
Most people wish they could forget the housing crisis of 2008. It wiped out fortunes and destroyed residential home prices.
Unfortunately, we may be about to see a repeat.
According to a new Bank of England report, house prices could tumble 16% due to the coronavirus crisis. That’s a “similar amount” to the 2008 financial crisis, the report reads.
A fall of 16% in UK residential property prices could be consistent with the MPR scenario.
To clarify the language in the quote, MPR is the bank’s separate Monetary Policy Report. It outlines the potential impact of the coronavirus and a path to recovery.
The Bank of England conducted a stress test on banks in light of the coronavirus crisis. It concluded the impact on the housing and mortgage market could be as sharp as the 2008 crisis.
In the GFC [Great Financial Crisis], which followed a period of rapid expansion of mortgage credit, residential property prices in the UK fell by a similar amount.
The central bank found that four major factors could trigger this house price slump:
These factors could ignite a wave of defaults in the housing market. How many people can pay their mortgage when they’ve lost their job?
Banks are already setting aside hundreds of millions of dollars to prepare for this scenario.
Could a similar price slump happen in the U.S.? Possibly…
We can watch this slump play out in real-time by tracking the median new listing price for real estate. According to Redfin, the median figure in the U.S. has already dropped from $327,000 in early March to $307,000 at the end of April – a 6% fall in two months.
Home sales are already down 14% and may remain stagnant while shelter-in-place laws remain. The timing is particularly bad for the U.S. as May and June are typically the best months to buy a house. Homes sell for a premium of 8-10% in the summer months.
The Bank of England report wasn’t all doom and gloom. Although prices may slump, they should bounce back much faster than the 2008 crisis. The report reads:
After falling, prices are then assumed to rise gradually as economic activity in the UK recovers and unemployment falls in the scenario.
The report goes on to say that the financial system is more prepared than in 2008. So the housing market should bounce back quickly.
Banks are more resilient than in the Great Financial Crisis. There are stricter conditions to take out a mortgage. Indefinitely low interest rates should help. And mortgage holidays are available through the crisis.
Last modified: September 23, 2020 1:55 PM