The housing boom that occurred in 2020 is not expected to last, but will instead continue to grow at a slower, more sustainable rate. Property experts and investors – such as Zuneth Sattar – have seen house prices in the UK rise by 7.5% in the last year, with the House Price Index for January 2021 showing that the average cost for a property is now £249,309.
The global pandemic is thought to have caused this boom in the housing market, as people started to re-evaluate their living situation. The dramatic rise in demand resulted in increasing house prices; however, in January 2021 the average house price fell 0.5% from December 2020.
House prices are not predicted to continue rising; this article will explore the four main factors contributing to changes in the housing market.
The Construction Industry
House prices rise when demand outstrips supply, and therefore prices fall again when supply matches demand. After the global financial crisis, it is believed that under-building in the construction industry resulted in a housing shortage of millions of homes. However, increased activity in the construction industry should help to address the imbalance in the market.
Millennials Entering the Market
The construction of new homes will also be increased to fulfil the demand from millennials who have reached peak buying age.
For example in the US, amongst 25 to 29-year-olds homeownership rates are beginning to rise, and the rate has accelerated further for millennials in the 30 to 34-year-old bracket. The number of 25 to 34-year-olds is larger than the population of 35 to 44-year-olds, which acts as a signal to the construction industry that demand for housing will only get bigger.
For further information about those most involved in the housing market, please refer to the embedded PDF.
A Drop in Inflation
Predicted inflation saw the price of many commodities soar throughout 2020, which resulted in costlier building materials. The increased cost of building materials is thought to have added a significant amount to the cost of each new home, which also contributed to the rising house prices. As the economy re-starts, it is expected that commodity-price inflation will return to normal.
Favourable Mortgage Rates
Mortgage rates dropped during 2020 and they have only just started to increase again. However, even as borrowing costs rise, it is not expected to lead to a cooling effect on the market. The reason for this is that mortgage rates remain relatively low, with it typically requiring a far higher rate to slow the market considerably.
Case Study: The London Property Market
The January 2021 UK House Price Index showed that house prices in London had risen since December 2020 by an average of 0.1%. During this period, the London property saw an increase in house prices of 5.3%, with the average property in the city being valued at £501,320.
This average price rise of 5.3% in London can be further broken down to better understand what type of property is most in-demand, as the pandemic has seen many people reassessing their living situation. The greatest price increase was for semi-detached properties, which increased by 10.4%, closely followed by detached (9.7%) and terraced (9.6%). The least in-demand type of property in the UK capital city was flats and maisonettes, which saw a price increase of just 1.4%.