Is the UK Housing Bubble About to Burst?

The UK housing market is sailing into turbulent waters. Dark clouds are on the horizon. With 1.8 million adjustable-rate mortgages (ARMs) set to reset at double the current monthly costs, many are left wondering: is the UK housing bubble about to burst?

While I can't predict the future, it’s clear that the market is moving into the eye of the storm.

In the US, most people use long-term, fixed-rate debt to finance their mortgages over 20 to 30 years. They’re secure and steady. We know what our payment will be tomorrow, next year, and next decade. But unlike the US, where these fixed-rate loans offer safe harbor, the UK’s mortgage system works differently.

Most people in the UK use 2-year or 5-year adjustable rate mortgages (ARMs). And 1.8 million of these mortgages are about to reset.

Back in 2020, when rates were below 2% , life was great! Monthly payments were low and people could afford the lifestyles of their dreams. “We need a pool.” Done. “I want a second story.” Easy. “How about a pied-a-terre in the city?” Not a second thought. Homeowners were sailing smooth seas.

But we knew those rates couldn’t last forever. They were unsustainable!

Since then, those 2% rates have risen to 5% ––2.5 TIMES HIGHER than before. And with rates about to reset for those 1.8 million mortgages, there's still a long voyage ahead for borrowers. Following the buying craze of the past three years, most homeowners have YEARS left on their mortgage terms. Monthly payments are about to jump. In some cases, they will DOUBLE. People who could afford their homes yesterday will be scrambling for money tomorrow.

But wait, there’s more! Mortgages payments, for most UK residents, already make up OVER 50% of their take home pay.

What’s going to happen when mortgage payments become 70-80% of take home pay?

Like I said, the UK is sailing into the eye of the storm, and it doesn’t look good.

As the storm approaches, the UK housing market is about to get battered. A vast number of people will struggle to maintain the lifestyle they thought they could afford––except now they can’t. Loan defaults will increase, a surge of homes will be put on the market, and housing prices could drop as much as 20% .

The UK housing market is sailing into treacherous waters, and the potential consequences should not be underestimated.

So take this as a lesson of caution: approach ARMs carefully. They may be enticing, but the long-term risks can be significant with black clouds on the horizon.

Those who survive will be lucky. Those who don’t will only start to feel the storm. Let’s face it: we can’t predict the housing market any better than a sailor can predict the weather. But by staying informed on trends and avoiding emotionally-charged decisions, we can chart a course that avoids the worst of future storms and, instead, helps us find calmer waters.