How the global financial crisis hit the UK housing market

The past decade has seen tighter rules around mortgage lending, more borrowing from the bank of Mum and Dad, and there's more change on the way

One of the major factors behind the global financial crisis was a downturn in the US housing market, and in turn, one of the major effects of the meltdown was chaos in the UK property market.

House prices tumbled: the average UK property’s value plunged by 20 per cent over 16 months, while transaction levels slumped from 1.65 million in the decade up to the crisis to 730,000 in the year to June 2009.

It took six years for prices to return to pre-crash levels, and growth has continued since, although it has slowed in recent months (in Northern Ireland, prices are still nowhere near their pre-crisis peak), and transactions have yet to recover.

Slower market

This slowdown in activity prompted the government to take action, and several measures were introduced in a bid to stimulate more house buying. In 2010, stamp duty was abolished for first-time buyers, and in 2013, the help to buy scheme was introduced, offering buyers an ‘equity loan’ of 20 per cent of a property’s value, interest-free for the first five years, provided they could stump up a 5 per cent deposit.

But transaction levels have slowed again lately. With consumer prices rising and most households facing a financial squeeze, property purchases are low on the list of priorities for most Britons. Even the approaching end of help to buy has failed to stir up the market.

Changing borrowing trends

Despite these schemes, home ownership has become heavily dependent on the bank of Mum and Dad, with Legal & General predicting that a quarter of all UK housing transactions this year will rely on cash from parents. The rise in parental assistance has been driven in part by house price growth, but also by tighter lending criteria, both of which have sent deposits soaring. Lenders have become a lot more circumspect about agreeing to mortgages, while regulation has also played a part.

London

The London market has, of course, followed a different trajectory to the rest of the UK since the crisis. From 2009 onwards, foreign money started flooding into prime property in the capital, with a mixture of investors and private buyers attracted by reduced prices and low prices.

As prices at the top end of the market began to rocket, so too did the value of property throughout the rest of the city. The borough of Hackney recorded the highest house price rise in the UK in the 20 years to 2018, with prices soaring by 568 per cent, outstripping even high-end boroughs like Kensington & Chelsea.

This rip-roaring market has changed the capital in many ways. Home ownership has moved further out of reach for most citizens, with the average price now more than 13 times the average Londoner’s salary. This has contributed to an exodus of young people from the capital, and the think tank IPPR has advocated a five-year property price freeze, making housing more affordable as other prices and wages continue to rise.

What does the future hold?

The outlook is far from clear. A decade after the financial crisis rocked the market, it’s now facing another period of upheaval: Brexit. The UK’s departure from the EU has plunged the property market (and most others) into uncertainty, with predictions ranging from a housing bubble, to a crash, to nothing at all.

Prices in the capital have already begun to fall back, and experts have warned that a no-deal Brexit would bring with it a 30 per cent chance of a London house price crash.

Meanwhile, Bank of England governor Mark Carney said this week that leaving the EU with no deal in place could lead to a financial crisis as bad as the crash 10 years ago, with house prices potentially falling 35 per cent in a worst case scenario.