England & Wales Economy and regeneration, Housing and planning

Is the potential impending collapse of the housing market a bad thing for the UK economy?



What is happening with the housing market?

Last week, we saw a further increase in interest rates to address continuing inflation, with further increases predicted by Christmas if the inflation rate remains stubbornly high. This will mean that those householders with mortgages, who are coming off fixed-term interest rates, could see their monthly mortgage payments increase massively. This will be devastating for many individual householders but what is the impact on the wider economy and the longer-term economic and social health of the UK?

Some Conservative MPs are calling on the government to reintroduce a tax break on mortgage interest payments – mortgage interest relief at source (MIRAS) – originally introduced by the Thatcher government and abolished by Gordon Brown, whilst chancellor of the exchequer, in 2000. The current chancellor, Jeremy Hunt, has rejected these calls on the basis that it will cost the Treasury far more than it will benefit the economy.

The last major collapse in the UK housing market occurred at the end of the 80s when the housing ‘bubble’ burst and interest rates rose close to 15%. The collapse continued well into the 90s, with house prices falling by some 30% or more in some areas – leading to an unprecedented level of repossessions by banks and building societies. This, undoubtedly, was one of the major factors in bringing down the Thatcher government. Margaret Thatcher had introduced ‘right to buy’ for council tenants and promoted an economy that encouraged home ownership as a means of social mobility.

What is the difference between now and the early 90s?

In an era of low inflation and interest rates, we have seen housing prices rise well above inflation and above other savings interest rates, year after year, providing investors with a goldmine in bricks and mortar across the country. The economic situation with the housing market, then, is little different from the 1980s.

However, there were far fewer ‘investors’ in the property market then than there have been over the past ten years or more. This has contributed to the struggle to provide adequate and affordable accommodation across the whole nation. Investors, both foreign and home-grown, have bought up properties in prime locations over recent years to let as holiday homes or even to keep empty as properties that will increase in value more than any other investment. This was not such a common investment in the 1980s.

Analysis of 2021 census data by the Office for National Statistics (ONS) has revealed that holiday homes make up a significant portion of properties in some areas, rising to almost one in five properties in Salcombe (Devon), Marlborough (Wiltshire) and Thurlestone (Devon). The figures show that 70,000 second addresses across England and Wales are used as holiday homes, mostly in coastal areas, national parks and Areas of Outstanding Natural Beauty.

Cornwall had the highest number of holiday homes in 2021, with more than 6,000, followed by Gwynedd with 2,590 and North Norfolk with 2,195. Holiday homes represent at least a tenth of properties in parts of Devon, Gwynedd, Cornwall, King’s Lynn & West Norfolk and North Norfolk.

LGIU members can explore this topic even further with our recent briefing on holiday lets and second homes:

Anyone at home? Second homes and holiday lets in the UK

This housing market economy has benefitted property owners and investors in property but has been detrimental to the need to provide housing for those key workers and others priced out of the rising property market. Low-interest rates, over the past 10 years or so, have contributed to the increasing property values that have led the UK housing economy down this road.

A collapse in the property market will be devastating for some of us but might be beneficial to the majority, if it forces investors to return ‘investment’ properties to the communities that require them to maintain the services that are provided by those crucial key workers who have been priced out of the housing market in such areas.

Where is this leading us?

Predicting economic and social outcomes of a market collapse is fraught with known unknowns, irrespective of all the unknown unknowns! Who is to say that the housing market is about to collapse (one of the known unknowns)? I suspect it is, though, so I will stick my head above the parapet and give you the two main options that I foresee and what you can do to steer it in the right direction for local communities.

I foresee the two main outcomes as follows:

  1. The investors in the property market will have the financial clout to hold those properties for years to come and increase rents or keep properties empty to maintain their return until interest rates come down and property prices recover.
  2. Investors will cut their losses and look to sell properties that are not delivering the income that they were before the (potentially impending) housing market collapse.

Those that fall into the first outcome will probably be companies, rather than individual ‘buy to let’ investors. The second outcome will, most probably, be individual investors who are struggling to pay increased interest rates on their mortgages.

I see the potential role of councils, in respect of both of those outcomes, as follows:

  1. Increased council tax on empty homes and increased pressure on central government to allow for new regulations enabling such surcharges and even further penalties.
  2. The purchase of, or long-term lets, on such properties to deliver on local housing and homelessness responsibilities.


The cost of living crisis is dragging down the UK economy but there are areas of the economy that are contributing to it. In my view, the unfettered rise of the housing market in the UK, over recent years, is one of the contributory factors in that crisis. When the housing market is totally open to a global economy and is running away with itself, in a particular country, then it can undermine the delivery of services for local communities.

Maybe the collapse of the housing market in the UK might not be such a bad thing for the economic social health of our nation? Time will tell, but local authorities can take the lead in shaping their local economies to manage any collapse in the housing market to meet the best outcomes for the social health of local communities with, of course, freedoms enabled by the relaxation of central government restrictions on local authority planning and regulatory controls.

Related resources

Recently updated collection on the cost of living crisis

Housing shortages: global crisis, local solution

Anyone at home? Second homes and holiday lets in the UK

Housing affordability crisis: Reconfiguring the debate

Housing and planning round-up June 2023


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