Will house prices drop in 2021?

So far, 2021 has been a record-breaking year on the property markets, with property prices at a record high. Will house prices drop in 2021? We take a look.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

'For Sale' sign outside of a terraced house in the UK

Image source: Getty Images

The stamp duty holiday that ended on 30 June 2021 and low borrowing costs created a home-buyer frenzy that drove house prices through the roof. Added to this, estate agents like Rightmove have suggested that 2021 has so far been the busiest year on record, with property sales and house prices at record highs. What does this mean for homebuyers? Will house prices drop in 2021? We take a look.

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Are house prices still rising?

The pandemic has encouraged many people to realise that they can work from home long term rather than commuting five days a week. For this to become a reality, many are looking for homes that meet their specific home-working needs. Space appears to be a vital factor. That’s why the demand for larger homes has increased so dramatically.

Unfortunately, there aren’t enough large homes to meet the demand. A shortage of housing has been a problem for the UK for some time. The government has begun taking steps to correct the imbalance between supply and demand, but in the short term, house prices might continue to soar.

Why is there a housing shortage in the UK?

According to the Guardian, the housing shortage has its foundation in policy decisions that go back decades. In the 1970s, local authorities built social/council houses. These houses provided an alternative to homeownership because they were cheap. However, in 1980, things changed.

Firstly, the right to buy scheme enabled council tenants to afford homes at huge discounts introduced in the Housing Act. A borrowing cap was also introduced to control how much councils could borrow.

For these reasons, once the councils sold most of their homes, the money available wasn’t sufficient to create new homes. They could neither replace the social houses sold nor renovate the ones that remained. The population increased and so did demand, but supply just wasn’t there. This led to an increase in house prices.

Secondly, mortgages became more readily available, with lenders offering finance with few regulations. This uncontrolled lending led to the banking crisis and strict rules were applied.

Lenders pulled riskier mortgage products off the market, making it more challenging for borrowers. This credit crunch pushed people to rent in the private sector and encouraged investment in the rental market.

Since the number of homes built yearly was declining, the government has been trying to resolve the housing shortage by removing the council’s borrowing cap and offering house-building and homeownership initiatives.  

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Will house prices drop in 2021?

It’s hard to say whether prices will drop, but we could see a reduction in demand now that the stamp duty holiday has ended. Lower demand could mean a decrease in house prices, but this may not occur rapidly.

Additionally, as the government works to meet its house-building target, we might see a gradual reduction in house prices.

Remember, if you’re an aspiring homeowner, the decision to purchase a house shouldn’t be based solely on the conditions of the housing market. It’s best to consider your financial situation first, then look at what homeownership opportunities you can take advantage of.

And if you encounter any difficulties, it’s always wise to seek professional advice before making a financial decision.

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