There is a growing body of conflicting information about whether the UK housing market is heading for a crash. Factors such as rising inflation, the cost-of-living squeeze, rising interest rates and the war in Ukraine are all driving a narrative that the UK is set to see a house price correction. However, house prices and rents in the UK continue to confound expectations, both growing in excess of 10% per annum according to multiple sources. Despite this it is highly likely that there will be a softening of this price and rental growth as the headwind factors begin to exert their influence on consumer behaviour. But a slowing in price growth is very different from a fall.
Furthermore, there are a number of reasons why JLL expect the potential for a house price crash to remain highly unlikely in the UK.
Reason 1 - Low unemployment reducing risk of distress
But we remain optimistic regarding the prospects for price growth in the second half of the year. Buyers in Prime Central London are less exposed to increases in living costs and interest rate rises which we anticipate will hamper growth prospects in the mainstream housing market over the coming months. And if overseas buyers return this summer as expected, alongside applicants taking the plunge to buy, we could see prices rise too.
The PCL lettings market continues to see rents increase, as prospective tenants outnumber available properties. Rents rose 2% this quarter and are up 14% annually. But applicant levels are settling, with 15% fewer prospective tenants registering in Q2 this year compared with last, meaning we could see more balance between supply and demand across the PCL market in the coming months.
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Reason 2 - highly leveraged households are rare
In 2006 prior to the Global Financial Crisis (GFC), some 40% of UK homes were owned with a mortgage. That proportion has since fallen to 32%, mostly due to an increase in private renting as well as the ageing nature of the UK population, meaning the proportion of homes owned outright has also risen (now the largest tenure in the UK in its own right at 33%). Furthermore, the number of highly leveraged households in the UK is now very low following the mortgage lending review which was undertaken post-GFC. The cost of debt remains relatively low as well. And while that may be rising as the Bank of England raises interest rates, they still remain low by historical standards as the graph below shows. Meaning we expect there should still be capacity for mortgaged households (compared with pre-GFC) to absorb the cost increase. For every £100,000 borrowed on a standard 25-year mortgage term, a 25bps rise in the base interest rate equates to an estimated additional £12 per month borrowing costs. While households are coming under pressure from all angles, mortgage payments are core spending and are less likely to be missed as the consequences are higher than other more discretionary spending.
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Reason 3 - Continued undersupply of new homes
Since the late 1970s the UK has failed to build the number of homes needed to meet the 300,000 per annum national target, typically falling short by about 100,000 homes per year. The current rising build cost pressures being felt by the construction industry will only exacerbate this housing shortfall as JLL’s forecasts in the below chart illustrate. JLL expects supply to now fall further back in 2022 and 2023 meaning an undersupply of 465,000 homes over the next four years alone. This undersupply of new homes is likely to be coupled with a fall in second-hand homes for sale. This combined with strong housing demand will underpin the value of housing stock rather than cause prices to fall. Although we could see fewer homes transact over the short to medium term as a result.
JLL’s UK House Price Forecasts - July 2022
| Sales price growth (% pa) | 2022 | 2023 | 2024 | 2025 | 2026 | 5 year cumulative (2022-26) |
|---|---|---|---|---|---|---|
| UK | 4.5 | 4.5 | 3.0 | 3.5 | 4.5 | 21.7 |
| Prime Central London | 7.5 | 5.0 | 2.5 | 3.0 | 3.0 | 22.7 |
| Greater London | 6.0 | 5.5 | 3.5 | 4.0 | 4.5 | 25.8 |
| South East | 5.0 | 5.0 | 3.5 | 4.0 | 4.5 | 24.0 |
| East of England | 5.0 | 4.5 | 3.5 | 4.0 | 4.0 | 22.8 |
| South West | 4.5 | 4.5 | 3.0 | 3.0 | 4.5 | 21.1 |
| East Midlands | 4.0 | 4.0 | 2.5 | 3.0 | 4.0 | 18.8 |
| West Midlands | 4.0 | 4.0 | 3.0 | 3.5 | 4.5 | 20.5 |
| Yorkshire & The Humber | 3.5 | 3.5 | 2.5 | 2.5 | 3.0 | 15.9 |
| North West | 4.5 | 4.0 | 2.5 | 2.5 | 3.0 | 17.6 |
| North East | 3.0 | 3.0 | 2.0 | 2.5 | 3.0 | 14.2 |
| Wales | 3.5 | 3.5 | 2.0 | 2.5 | 2.5 | 14.8 |
| Scotland | 4.5 | 4.0 | 2.0 | 3.0 | 3.5 | 18.2 |
JLL’s UK Rental Value Forecasts – July 2022
| Rental growth (% pa) | 2022 | 2023 | 2024 | 2025 | 2026 | 5 year cumulative (2022-26) |
|---|---|---|---|---|---|---|
| UK | 2.5 | 2.5 | 2.0 | 2.5 | 2.5 | 12.6 |
| Prime Central London | 6.0 | 3.5 | 2.0 | 2.0 | 2.5 | 17.0 |
| Greater London | 4.0 | 3.0 | 2.5 | 2.5 | 3.0 | 15.9 |
| South East | 3.0 | 3.0 | 2.0 | 2.5 | 2.5 | 13.7 |
About JLL | July 2022
JLL is a leading global professional services firm specialising in real estate and investment management, with $16.6bn annual revenue in 2020, operations in over 80 countries and a global workforce of over 90,000. With over 7,000 employees and 15 offices in the UK, we support our investor, developer and occupier clients at every stage of the property lifecycle across both commercial and residential asset classes. This includes land purchase, access to capital, planning, development advisory, leasing, building management and sales.
JLL’s Residential and Living team consists of over 300 professionals who provide a comprehensive end-to-end service across all residential property types, including social housing, private residential, build to rent, co-living, later living, healthcare and student housing.
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