Low interest rates can help save the property market

TWELVE months ago, the unemployment rate in Newbury stood at 1.5 per cent of the working population – now it is four per cent.

So what impact will this rise have on the Newbury property market?

This summer saw the property market do exactly the opposite of what was expected when Covid hit.

The Stamp Duty holiday added fuel to pent-up demand for people to move to property with extra rooms (to work from home) and gardens.

This prompted a brief hiatus in the number of people selling and buying over summer and autumn.

Yet, insecurity around rising unemployment, led to many mortgage companies becoming more cautious, predominantly when lending to the self-employed or first-time buyers borrowing more than 85 per cent of the value of the home

In the spring, economists predicted that unemployment would rise to a peak of 6.5 per cent in Q3 2020, returning to the 2019 levels (3.4 per cent) by 2022. As we speak, nationally the unemployment rate stands at 6.3 per cent.

The toll Covid has had on people’s livelihoods has been massive, with an additional 1,434,515 people out of work, although it is important to note this is still lower than after the Credit Crunch – 2008 to 2013. Looking at all the study papers on the topic, there is a link between unemployment and house prices, yet it’s not as strong as you would think.

The larger factors are the demand and supply of property on the market and interest rates. Unemployment has hit different sectors of the economy to a lesser or greater extent.

For example, for office workers, people who work in tech and sciences and the professional services, the impact on jobs has been comparatively mild, with many personnel able to work from home.

Yet for those who work in hospitality, leisure, retail, entertainment and catering, remote working is not an option and these have been hit the hardest. Unfortunately, these industries are the ones that tend to employ the younger generation, who invariably live in private rented accommodation.

Being made redundant puts their dream of buying their first home back as they try and get themselves back on their feet by initially finding a job.

So, what is the prediction for the property market under the cloud of this growth in unemployment? One massive redeeming factor that will save the property market is low interest rates.

This will keep mortgage payments low, meaning repossessions should be kept to a minimum (there shouldn’t be a flood of cheaply priced properties coming onto the market at the same time and dragging house prices down).

Yet, I still consider property prices at Christmas 2021 won’t be much different from today.

This is because people have been paying top dollar to secure their dream home, often spending the money they saved on Stamp Duty on the purchase price. When Stamp Duty tax returns in April, there will be less money to pay for the property... thus property values will be marginally lower in a year’s time.

Rents are very much tied to the rise and fall of wage growth and will rise by between 13 per cent and 15 per cent in the next five years.

Therefore, something tells me there could be some interesting buy-to-let investment opportunities for investors willing to play the market for the long term. If you are a landlord, or a homeowner looking to buy or sell, please don’t hesitate to contact me.