Is 2021 the right time to buy a house?

Is 2021 the right time to buy a house?

The year 2020 was a roller-coaster year that put many people's plans on the back burner. Now that a new year is upon us, you might be thinking about getting your goals back on track. For many people, that could mean buying a first home or moving to a new property. But is 2021 the right time to buy a house? From house price predictions and the economy to your own personal finances, here are some things to think about.

The housing market is expected to weaken

Despite the economic fallout of Covid-19, the housing market had a great year in 2020. A build-up of pent-up demand from spring’s lockdown, combined with the Stamp Duty holiday, saw buyers rushing to snap up property over the subsequent months.

According to the Royal Institution of Chartered Surveyors (RICS), the number of house hunters and properties being listed for sale increased for the fifth month in a row in October, marking the longest run of growth since 2013.

Separate research by Halifax shows that in October UK house prices rose at the fastest annual rate in more than four years. The average price of a home topped £250,000 for the first time, with prices up 7.5% compared with a year earlier. This activity isn't expected to continue indefinitely. Many experts think the growth in sales and house prices will start to slow when the Stamp Duty holiday ends on 31 March.

"Though the renewed lockdown is set to be less restrictive than earlier this year, it bears out that the country's struggle with Covid-19 is far from over," said Russell Galley, Halifax's Managing Director. "With a number of clear headwinds facing the housing market, we expect to see greater downward pressure on house prices as we move into 2021."

The economy is in poor shape

The health of the housing market is generally linked to the wider economy, which has suffered immensely during the pandemic. Although house prices haven't been affected so far, this has been largely down to the Stamp Duty holiday. The so-called 'race for space' - where people working from home are looking for larger homes with outdoor space - has also helped to fuel demand. Halifax figures show that, since March, the price of a typical detached home has increased by 6%, compared with 2% for the average flat.

There's a fear the housing market could suffer when the severity of the economic downturn kicks in. Chancellor Rishi Sunak warned in his Spending Review on 25 November that the pandemic would cause lasting damage to growth and employment. Economists expect the economy to shrink by 11.3% in 2020 - the biggest decline in 300 years. It isn't expected to return to its pre-crisis size until the end of 2022. Meanwhile, the unemployment rate is forecast to hit 7.5%, which is the highest level since the financial crisis in 2009.

Lenders could tighten their criteria

If you’re a first-time buyer, you might think a fall in house prices is a good thing. The problem is that economic uncertainty often causes lenders to tighten their lending criteria, meaning you could find it harder to secure a mortgage. When unemployment rises, lenders tend to become more concerned about the ability of borrowers to make repayments.

Many lenders have already withdrawn high loan-to-value products and others have tightened their affordability criteria. According to a report by Money Expert, only one 90% loan-to-value deal remained on the market as of 2 October. The result is you might need to save a larger deposit to be approved for a mortgage. While this might come as a blow, lenders typically offer their best deals to those with big deposits, so it could prove beneficial in the long run.

You could go into negative equity

If you buy a house and prices subsequently crash, there's a risk your property will go into negative equity. This is when your property is worth less than the mortgage secured on it. Negative equity becomes a problem if you subsequently decide to sell your home. You could owe more money to the lender than your property is worth and end up making a financial loss.

If you're planning to buy a home and live in it for decades, negative equity may be less of an issue. House prices might begin to rise again, which could reduce negative equity or reverse it. However, you might encounter difficulties when your mortgage deal comes to an end. Some lenders won't offer a new deal to people in negative equity, so you could be moved onto their more expensive Standard Variable Rate.

Think about whether buying is right for you

It's wise to be mindful of house prices and the wider economy when you’re considering buying a house. However, the most important thing to think about is whether it's right for you. If you've got your heart set on a new home and your finances are in great shape, it's certainly worth discussing your options with a mortgage broker. Some of the main things to consider are whether you've saved up enough money for a deposit and can afford the estimated monthly repayments and upfront costs.

A mortgage broker will be able to explain how much you're likely to be able to borrow, how much different mortgage deals would cost you each month, and what effect a larger deposit could have. They can also search the market for the right deal for you. If you're furloughed, or a deposit would wipe out your emergency cash savings, it might be better to wait until you're on a stronger financial footing. Again, a mortgage broker can help you assess your options.

Get in touch

If you'd like advice on buying a home, please get in touch. To speak to one of NM Money’s qualified mortgage specialists, request a callback or call us on 03300 583 859.

Please note: Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.