UK house prices can fall by 20% 'without causing distress'

UK banks have been stress-tested against a 30% fall in house prices and have proved resilient.

UK house prices could fall by as much as 20% without causing distress to most homeowners, Bank of England deputy governor Jon Cunliffe has said.

The Bank of England does not forecast property prices, but Mr Cunliffe told reporters that homeowners may see “the market falling back from the highs over the last two years” when cheap money and stamp duty reliefs during the pandemic sparked a mini-boom.

Credit Suisse expects a 10% decline in house prices in 2023, and other economists also predict large falls.

Speaking to press after the Bank of England published its Financial Stability Report, Mr Cunliffe said he expected some of Britain’s two million buy-to-let owners to sell “and take capital profits” since the vast majority are on interest-only deals and will be hardest hit by rising interest rates.

Those sales “will affect house prices”, Mr Cunliffe said. “But of course, house prices have gone up nearly 20% over the past two years. So, if you think about it, there is a lot of space before you start to see negative equity and distressed sales,” he said. 

Bank of England governor Andrew Bailey added that “there is nothing easy about the situation we’re in at the moment. We are very conscious of the effects it’s having on households — very conscious of that.”

But he said UK households are more resilient today than in previous downturns such as the 2008 financial crisis and the 1990s recession as aggregate household debt is lower and servicing costs account for a smaller share of post-tax disposable income. 

Banks are also “required by regulation to support their customers through these problems more than they did in the past — they can’t resort to repossession with the speeds that has gone on in the past”, Mr Bailey said.

UK banks have been stress-tested against a 30% fall in house prices and have proved resilient.

Sweden

Meanwhile, the value of Swedish residential and office properties is set to decline just as commercial property owners across the Nordic region need to refinance large bond maturities in the coming years, credit ratings companies said.

The commercial property sector has repeatedly been flagged by regulators as the main risk to financial stability in Sweden, as a negative spiral of sales and dropping values amid rising interest rates and a looming recession could lead to loan losses at banks.

The Oslo-based Nordic Credit Ratings expects that prime office properties in Sweden could lose some 10% in value through 2024, while residential property could see “a considerably larger decline” it said. 

Separately, its bigger rival S&P Global Ratings said Nordic property companies have sufficient liquidity for 2023, but warned that their refinancing will peak in 2024 and 2025. 

Bloomberg