Will there be a property recession in 2023 or 2024?
I have studied every recession that has occurred over the previous 100 years, but I cannot claim to have made any exact predictions despite my many attempts over the years. I can, however, provide you with some information about what might happen should the UK real estate market experience a downturn. A prospective real estate crash, in my opinion, might begin in the commercial office sector. Since COVID, many major tower blocks with poor occupancy rates are finding it difficult to re-finance, which is seriously hurting the US market even more than the UK. Many of us now work from home as a result of a fundamental shift in the office sector.
Markets have taken a bit of a dive over the past week as the Federal Reserve signalled that interest rates will likely remain higher for longer in order to bring inflation sustainably back down to its 2% target. The UK rate was unchanged this week, which gave home owners some hope we may be at the top of the interest rate cycle.
Rumours are in the US, with many suggesting that many large commercial office blocks are struggling to re-finance due to higher rates and the double whammy of the buildings taking a big hit on their values with game changing occupancy rates post Covid. New York’s doomed legacy office market is in a crisis, and to convert these buildings to accommodation for young professionals, who still seem eager to live in New York with the overall shortage of affordable housing, is simply too expensive based on the capital values based on today’s sales prices per meter.
The big question not so discussed in the media is about the London office property market and whether we have the same issues in London. It seems like the perfect storm in commercial property, between energy retrofit costs, higher interest rates, and the changing post-COVID lower occupancy rates.
The commercial market will be more affected by the correction if there is a property crash. Due to low demand, plenty of supply, and extremely high commercial loan rates, which are 2/3% higher than residential. The UK residential real estate industry is also struggling; in contrast to the office market, which is oversupplied, this sector is not; thus, should a recession in the UK materialise, I don’t anticipate the same degree of suffering. Due to the residential market’s limited supply, I anticipate any price drops to be swift and not as severe as market confidence wanes. The dynamics of supply and demand simply become irrelevant if investor confidence is lost as they flee the market.
The UK market is largely driven by interest rates and consumer confidence, which is key, and when either or both are damaged and weakened, a correction occurs. As usual, my primary focus is on expanding my HMO strategy in the North West. This strategy enables me to make a profit after all expenses, which enables me to pay back a repayment mortgage rather than the usual interest-only mortgage preferred by most investors in the UK. As you pay off debt each month and contribute twice as much to your eventual pension pool, this has a significant beneficial impact on your finances in the long run.
In 2024, will there be a property correction? Probably yes is the correct response.
