Over a year after the beginning of the global pandemic, many people are wondering what will happen to the property market in 2021. Will house prices crash, will interest rates increase, or will we experience another recession?
A Brief History of Recession
The UK economy has weathered a number of recessions in recent history, for example in the early ‘80s and ‘90s. In the 1980s mortgage interest rates increased by a huge 15% and in both recessions, unemployment grew to 10%. However, the property market did not crash.
Forecasts for 2021 predict a 7.5% unemployment rate, which does not come close to the 10% of the ‘80s and ‘90s, and interest rates are also nowhere near as high as they were in previous recessions. For further information about recession, please refer to the embedded PDF.
The 2021 Property Market
Whilst interest rates have stayed stable and unemployment is not as high as previous records, the property market is suffering from a lack of affordability. People cannot get mortgages as they are becoming too high and unaffordable, which could negatively affect house prices.
Another factor that may see house prices drop in 2021 is if the unemployment rate gets worse or does not improve. Unemployment disproportionately affects the younger generation, who are in unstable work or on relatively low wages. This means that people in their late teens and early twenties are far less likely to own property.
Yet it’s a different story for young people who are working in professional industries that are relatively secure, as they are less likely to face reductions in income or unemployment. Young professionals who can afford to enter the property market are looking to buy, which makes a big drop in house prices less likely.
Demand and supply is another factor that affects the property market, and for the last two decades the government has been under-achieving on its target to build 200,000 new homes every year. The government has finally changed its target, increasing the number of new homes to 300,000 per year to keep up with population growth – yet many are skeptical that the government will reach this new target.
If the government continues to build 140,000 to 150,000 new homes a year, as it has done for the last 25 years, then it is inevitable that the demand for housing will remain high. As the population continues to grow – and for as long as the government under-builds new housing – demand will outstrip supply, meaning that house prices will continue to rise.
Looking forward, the Office for National Statistics has predicted that by 2029 the population of the UK will reach 70 million. This huge population increase will impact the demand for housing, and therefore house prices. A higher birth rate is not the only factor in a growing UK population, as it is predicted that a further one million people will return from overseas, for example British expats returning from Hong Kong.
Current circumstances would suggest that the property market will not crash in 2021. Paul Smith, Touchstone Education co-founder, works with potential property investors to ensure that they make wise and prudent investment decisions.