Will the coronavirus pandemic cause a housing market fallout on the scale of the 2008 crisis? | Source: AP Photo / David Zalubowski

  • Bank of England hints at a 16% drop in home prices, matching the 2008 housing bubble crash.
  • The median price of residential listings in the U.S. has already slumped since March.
  • But house prices should bounce back faster than after the Great Financial Crisis in 2008.

Most people wish they could forget the housing crisis of 2008. It wiped out fortunes and destroyed residential home prices.

Unfortunately, we may be about to see a repeat.

According to a new Bank of England report, house prices could tumble 16% due to the coronavirus crisis. That’s a “similar amount” to the 2008 financial crisis, the report reads.

A fall of 16% in UK residential property prices could be consistent with the MPR scenario.

To clarify the language in the quote, MPR is the bank’s separate Monetary Policy Report. It outlines the potential impact of the coronavirus and a path to recovery.

Why House Prices Could Mirror the 2008 Crisis

The Bank of England conducted a stress test on banks in light of the coronavirus crisis. It concluded the impact on the housing and mortgage market could be as sharp as the 2008 crisis.

In the GFC [Great Financial Crisis], which followed a period of rapid expansion of mortgage credit, residential property prices in the UK fell by a similar amount.

The central bank found that four major factors could trigger this house price slump:

  1. Rising unemployment.
  2. Decrease in national and global GDP.
  3. Decline in corporate revenues.
  4. Lower household income.

These factors could ignite a wave of defaults in the housing market. How many people can pay their mortgage when they’ve lost their job?

Banks are already setting aside hundreds of millions of dollars to prepare for this scenario.

Could a similar price slump happen in the U.S.? Possibly…

U.S. Listing Prices are Already Slipping

We can watch this slump play out in real-time by tracking the median new listing price for real estate. According to Redfin, the median figure in the U.S. has already dropped from $327,000 in early March to $307,000 at the end of April – a 6% fall in two months.

Median listing prices fell off a cliff in April. Source: Redfin

Home sales are already down 14% and may remain stagnant while shelter-in-place laws remain. The timing is particularly bad for the U.S. as May and June are typically the best months to buy a house. Homes sell for a premium of 8-10% in the summer months.

The Housing Market Should Bounce Back More Quickly Than in 2008

The Bank of England report wasn’t all doom and gloom. Although prices may slump, they should bounce back much faster than the 2008 crisis. The report reads:

After falling, prices are then assumed to rise gradually as economic activity in the UK recovers and unemployment falls in the scenario.

The report goes on to say that the financial system is more prepared than in 2008. So the housing market should bounce back quickly.

Banks are more resilient than in the Great Financial Crisis. There are stricter conditions to take out a mortgage. Indefinitely low interest rates should help. And mortgage holidays are available through the crisis.

This article was edited by Aaron Weaver.