The future of housing market in the UK – Predictions for 2021 and beyond

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Dr Anandadeep Mandal
Department of Finance, University of Birmingham

Starting January 2020, with the onset of the pandemic, many experts believed and expressed that the price of owner-occupied properties will be negatively impacted. The reason being house owners’ occupation is a market that is dependent on the economy. During the 2007-09 global financial crisis, the UK GDP fell by 6% during the first quarter of 2008 and the housing market in the UK fell by over 20%. With the UK GDP crashing by 20% in the second quarter of 2020, it seemed most likely that initial projection of the housing market for the ongoing pandemic will hold true. Similar views were stated by the UK government’s Office for Budget Responsibility (OBR). In November 2020, OBR projected a 9% fall in the house prices between the end of 2020 and the beginning 2022. However, in the OBR’s March 2021 projections, the house prices are forecasted to be well above the 2020 levels.

The surprise rise in housing prices: what is going on?

OBR’s revision of forecast suggests that there has been a rise in the house prices in the UK since the onset of pandemic. The annual rise has been approximately 9% in the first quarter of 2021. This is the highest rise we have witnessed since 2014.

At the first instance, the forecasts should not have gone wrong as the determinants of house prices are fairly well researched over the years. The key factors include household income, accessibility of credit, interest rate, supply of houses and tax advantages to homeowners. However, the significance of the house prices to the overall health of the economy is more complex and it is heavily dependent on government interventions that have direct or indirect impacts on household incomes. Employment rate and wage growth both play a part in consumer confidence, impacting how confident buyers are and their willingness to pay.

It is evident that the combination of low interest rates and stamp duty holiday has significantly contributed to the sudden rise in house prices during the pandemic. There is strong empirical evidence for low interest rates having a significant impact on house prices, especially when supported by accessibility of mortgage credit. Furthermore, the lowering of transaction costs by omission of stamp duty in July 2020 – and later extended until March 2021 – saw the housing market booming.

But this is not the complete story. One of the key determinants of housing demands that drive house prices is household income. The government’s job retention scheme, i.e. the furlough scheme, ensured that household disposable income was not much affected. By the end of 2020, it had returned to pre-pandemic level. To illustrate, historically 1 percent reduction in real income led to around 2 percent reduction in house prices. So, if the incomes had fallen, the impact on house prices would have been significant.

What will happen next?

So, are we expecting to witness a slump in the housing market soon? There are several reasons to believe that there will be a correction in the real estate market with some expected slowdown in the price growth. These include end of the furlough scheme in September 2021, the end of stamp duty holiday on 1st July 2021, decrease in public spending, rise of inflation and higher interest rates.

There are additional concerns that relate to the nature of house-price risk. Considering that housing is an investment with both risk and return, less attention is paid to the former while making predictions. With house prices rallying quickly over the last year, the market has become more vulnerable to external shocks to the economy, such as a debt crisis or a sharp rise in oil prices. The reason is when housing compromises a higher proportion of a household income, external factors might lead to a drop in investment pattern, reducing the demand for houses.

In simple terms, it is fair to say that price-growth in the housing market is being over-predicted. But, as the UK continues with its successful vaccination programme and aims to introduce booster doses by the end of this year, people from all generations will become vaccinated. This will provide a big boost to the economy, leading to the re-opening of businesses. Therefore, it is safe to say that even though there will be corrections in the housing market we will not witness any major collapse.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.

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