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Personal finance

What falling house prices mean for your finances – and your retirement

With house prices descending from dizzying highs, we take a closer look at what this could mean for your finances.

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 2 years old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

House prices have gone down. They fell 0.3% between October and November last year, and they continued to pull back in December. While the annual figures are still showing double digit growth, if we continue on this trajectory, we’re likely to get to a point when they’re falling.

Falling house prices can cause real problems for people with very little equity in their home, or those on the cusp of trading down. But they can also have a big impact on our finances.

This article isn’t personal advice. If you’re not sure if a course of action is right for you, ask for advice.

The impact of falling house prices on your finances

Homeowners tend to feel less well off when prices fall. They can cut spending – particularly on home improvements and furnishings.

When prices were rising, some will have dipped into the equity on their property either to do work on their home, or to cover other gaps in their finances – from paying off short-term debts to making up for shortfalls in their income. Not being able to dip into growing equity means they’re forced to make big changes to their spending. If not, these areas of their finances start to cause problems.

Our savings and resilience tool bases its forecasts on house prices dropping 10.4% from the peak in the third quarter of 2022 to the end of 2023. It’s also modelled the impact of an 18% drop if more downside risks come to fruition. With a bigger fall in house prices, working-age homeowners would see their average retirement resilience score drop seven times more than for renters.

To get a rounded picture of what people’s future retirement income and outgoings could look like, our comparison tool looks at how much equity people have in their home, alongside pension savings and other assets.

The idea is that the less equity you have when you get to retirement, the more you’ll need to pay to keep a roof over your head. That also means there’s less opportunity to use that equity to support your income.

House prices and building equity

Rising house prices automatically build the equity in your home, because the mortgage becomes a smaller percentage of the value of the property. Conversely, falling house prices shrink the amount of equity you hold. The more you have borrowed, the more any changes are magnified.

The average resilience drop for Gen Z and Millennial homeowners was three times higher than for the boomer generation. That’s because they tend to have borrowed a larger proportion of the house value.

This is coming at a time when rising mortgage rates are adding an average of £250 to people’s monthly outgoings, which hits overall resilience too.

Our comparison tool shows our short-term resilience will take a dive as people remortgage this year. Some people will be forced to spend more of their income rather than squirreling it away, and others will spend their savings.

Remortgaging in 2023 – should you consider remortgaging now or wait?

Debt is also a concern, as some will struggle to balance a tighter budget, and could start to build expensive short-term debts.

Times are increasingly tight for homeowners. If your mortgage is set to rise, it’s essential to take stock and work on cutting your costs, to help protect your savings and stave off debt.

Learn more about controlling your debt

You might be tempted to switch to an interest-only mortgage for a period, or extend the term to help bring prices down. If you are, make sure you consider all your options, and the negative impact it will have on your retirement plans.

Explore our savings and resilience tool

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Written by
Sarah Coles
Sarah Coles
Head of Personal Finance

Sarah provides insight and analysis to the media on topics such as savings and financial planning, and co-presents HL's ‘Switch Your Money On' podcast.

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Article history
Published: 24th January 2023