Four ways the economy has affected the housing market in the UK

According to latest data published by the Land Registry, average house prices in the UK have decreased by 0.6% in 2023, falling slightly to £288,000 in October 2023, £3000 lower that the year before.

These number are in correlation to the cost-of-living crisis that the country is suffering. But how does the economy affect the housing market? We’ll share four important ways in this article.

Supply and demand

The supply of housing simply means the number of properties available in the housing market, whereas demand means the number of people wanting to buy a property. When there’s more demand than supply, house prices increase. And more supply than demand has the opposite effect. Demand in the property market is often influenced by other economic factors such as interest rates, mortgage rates and unemployment rates.

Inflation rates

Inflation is the measure how much the price of goods and services increases over a given period of time. In other words, it’s a measure of how much value a currency is losing, as a given amount of money buys less goods and services if they cost more. The Bank of England increases the bank rate to try to calm down inflation. This determines how much interest banks and financial institutions can charge on loans, including mortgages. So, it costs more to take out a mortgage on a home when inflation is high.

Mortgage rates

High or increasing mortgage rates typically slow down the housing market. When it’s more expensive to take out a mortgage, they’re less likely to purchase property. And because of the resultant drop in demand, house prices tend to fall. This can result in house price growth slowing down or levelling off – but in extreme cases it can cause the housing market to crash.

Unemployment rates

There are many costs involved in buying property, ranging from mortgage fees to essential house buying services such as conveyancing. So, fewer people can afford to cover these costs when unemployment rates are high. In fact, unemployment rates don’t have to actually be high for this to happen. Even the prospect of unemployment due to an economic recession can be enough to put people off buying property.

Whether actual or imagined, higher unemployment results in lower demand for housing, which can cause house prices to fall in turn. According to data released by the Office for National Statistics, the UK unemployment rate rose by 0.3% through the first half of 2023.