Could a UK house price crash destroy the FTSE in 2023?

At FTSE has made a promising start to the year, fighting off the villains who thought 2023 would be even worse. But there is a big shadow on the economy as analysts warn that the UK could suffer a house price crash this year.

Halifax predicts an 8% decline next year, while Capital Economics predicts a 12% meltdown, with a worst-case scenario of 20%. Today posted grim figures from the Bank of England, which showed net mortgage lending fell from £4.3bn in November to £3.2bn in December.

Let’s not panic

If that happens, it will be a real blow to domestic morale. Falling property values ​​have left tens of millions of homeowners feeling poor. Those who have bought in recent months can be plunged into negative equity, where the house is worth less than what was borrowed to buy it.

Falling sales will have an impact on many related sectors, everyone from plumbers to electricians to kitchen fitters and sofa dealers. Big banks may be affected by the wave of debt, forcing them to foreclose on properties to repay loans.

The housing price crash is bad news for homebuilders, as it will drive demand for new builds, reduce sales prices, and build up the order book. That explains why Barratt’s Development currently trading at just 5.51 times earnings, while Taylor Wimpey trading at 6.41 times, and persimmon in 5.72.

The last 12 months have been tough on share prices. Barratt and Taylor Wimpey were down 24.47% and 21.15% respectively, while Persimmon was down 39.77%. Home prices may not have collapsed yet, but home building stocks have.

I recognize the risk, but think that the possibility of a house price crash is overstated. Mortgage rates rose after ex-Chancellor Kwasi Kwarteng’s bad mini-budget on September 23, frightening borrowers.

FTSE can survive this

But figures published yesterday by mortgage broker L&C show the average two-year rate has now fallen from a peak of 5.90% in November to 4.67% today. The five-year fixed rate has fallen to 4.32%, easing pressure on borrowers and homebuilders. Shares in Barratt and Taylor Wimpey are both up 20% over three months. Persimmon recovery will take longer.

The Bank of England is expected to raise its base rate to 4% on Thursday, but mortgage rates may not rise that much. Most banks believe that interest rates are close to their peak and may begin to decline by the end of 2023.

As mortgage rates fall and properties become more affordable, buyers should return to the market.

As the property is still in short supply for the huge population in the UK, I believe demand could be better than expected a few weeks ago. Anything can happen, of course, but if I’m right, the outlook could be bright for the UK economy, the FTSE in general, and housing stocks in particular.