How sensitive to the economy is UK property?

How sensitive to the economy is UK property? [Photo: miluxian via iStock]

In recent months, there has been an increased focus on how the British economy would be affected for the rest of 2016 and beyond if the country was to vote to leave the EU when a referendum on the divisive issue rolls around on June 23rd this year. And with the potential for the economy to suffer at least a temporary blip in the aftermath of such an eventuality, we ask, what would it mean for the property market if the economy was to suffer?

According to a new report released in the past week by the Office for National Statistics (ONS), the economy and the property market have been, and remain, intrinsically linked, with strength in the economy bringing about strength in the housing sector, and the opposite being true when the economy turns towards negative trends. 

We most recently saw this reality in 2008, when the property market was riding high on the back of a 2007 that saw peak prices hit time and time again across the country. However, the recession that came in 2008 caused prices to fall dramatically, so dramatically in fact that it's only been in the last couple of years that the market has fully recovered and surpassed the previous peaks seen in price and activity in 2007.

So just what does the economy affect in the property market, and how does this manifest itself?

Mortgage availability

The first thing that happens whenever the economy starts to suffer is that mortgage availability immediately suffers. Jobs tend to be cut and people have less disposable income when the economy is struggling, which leads to lenders getting somewhat jittery about repayments. Because lenders don't want to see defaults on payments and losses on mortgages approved, they will start to become stricter, carrying out deeper financial stress tests to ensure that people can afford the mortgages they are approved for. 

What this means, of course, is that people will be less likely to be approved, and there are immediate dips in the volume of people looking to buy as a result, which can cause house prices to fall and the market to suffer, at least in the short term. This was best evidenced in the period between 2006 and 2009. Before the economy dipped, 2006 saw 1.67 million house sales, but by the time we reached the recession and 2009, there were only a little over 800,000 home sales, showing just how sharply the market can fall when the economy dips. 


Another aspect that can get in the way of house prices, and linked to mortgage availability, is the price of a deposit. As mentioned above, when the economy is unhealthy, lenders will seek to look towards lower risk lending, and this can mean that they offer less of a contribution towards a house price than they have in the past. 

For example, in 2009, there was a sharp increase in the percentage of the final sale price of a house that buyers had to bring to the table as a deposit. This hit almost a third in the period following the recession, far higher than at any point in the past, and it's taken until 2015 to drop again to 21 per cent. Of course, when the deposit required to buy a home rises in this way, it cuts the number of people who can buy a home drastically, particularly first timers who can often become priced out of the market in these cases. 

Personal finances

While banks and other lenders have a huge influence on how the market softens in the aftermath of any economic problems, people themselves are also an important factor to consider, especially when their personal finances come under greater scrutiny. 

When the economy dips, generally speaking businesses will be the first to make cuts. This means that jobs are lost, pay freezes are put into action, and generally people will feel less than confident about their own immediate financial future. When this happens, we see fewer people choose to buy a home, worrying that they will not be able to afford it if their own employment situation should change, for example. 

This leaves house sales down markedly, and is one of the main reasons that the private rented sector became such a significant player in the aftermath of the last recession. People chose to rent for the timebeing, turning their back on home ownership. This could be one of the main reasons that in the last few years we've seen the rental market grow to more than four and a half million properties.

Whatever the reasons for the economy fluctuating, it's clear that any change therein can have real effects on the property market as a whole, showing just how closely the two are linked.