5% Unemployment and the Local Property Market

By Daren Cope

12 months ago, the unemployment rate in Derby and Burton stood at 2% of the working population, yet with Coronavirus hitting the UK, what impact will this rise in unemployment have on the local property market?

As I have discussed a number of times in my articles, this summer saw the local 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 their home over the last summer and autumn.

Yet, insecurity around rising unemployment, led to many mortgage companies becoming more cautious in the later months of summer, predominantly when lending to self-employed or first-time buyers borrowing more than 85% of the value of the home. They were understandably cautious about lending money to someone that could not afford a mortgage due to an insecure income or not having a job.


Unemployment Rates

Back in the late spring, economists were predicting that UK unemployment would rise to a peak of 6.5% in Q3 2020 and would return back to the 2019 levels (3.4%) by 2022.

As we speak, nationally the unemployment rate stands at 6.3%. The toll that Covid has had on people’s livelihoods has been massive, with approximately an additional 1,400,000 people out of work, although it is important to note this unemployment rate is still lower than the five years following the Credit Crunch years 2008 to 2013.

So, with such a growth in unemployment and the ‘Brexit’ transition, this may hold back the enthusiasm of many companies to take on more staff, reducing any rebound in employment. If unemployment remains high, this will influence perceptions of employment and personal/household financial security, which are the ultimate drivers both for house prices and whether people buy and sell.

For example, just looking at East Staffordshire; 1515 people were unemployed a year ago and today that stands at 3,685.


Unemployment and House Prices

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. Interestingly, in the past two recessions, the comparatively richer regions of London and South East, house prices have been more sensitive to unemployment and house price changes than the rest of the UK, yet London and the South East also bounced back quicker and higher after the two recessions.

The concept behind this is that more expensive house prices in the South drop more than lower priced houses in the rest of the UK. This is because those more expensive regions have, by definition, more expensive house prices meaning the homeowners have higher mortgages, so if they become unemployed, their homes are more likely to be repossessed because of the high mortgages, and consequently that reduces house prices in that area quicker because repossessed houses tend to sell much more cheaply compared to normal house sales.

The health of the local property market in 2021 and beyond really depends on what is happening to the economy as a whole and more specifically what is happening in our local mini-economy.

When we drill down though, unemployment has hit different sectors of the economy to a lesser or greater extent. For example, for office workers, people who work in tech, sciences and the professional services, the impact on jobs has been comparatively mild, with many personnel able to work from home. Yet for others, such as those who work in the hospitality, leisure, retail, entertainment and catering industry, remote working is simply not an option and these have been hit the hardest.

Unfortunately, the industries mentioned above are the ones that tend to employ the younger generation, who invariably live in private rented accommodation, rather than own their own home. Being made redundant puts their dream of buying their first home back even further as they try and get themselves back on their feet by initially finding a job, let alone save for a deposit.

Housing markets will recover quickest in towns and cities, where jobs are in the more resilient employment sectors.

For example, in London, unemployment jumped really quickly in 2009 with the Credit Crunch, yet came down just as quick in 2011, just as the property market in London started to take off, whilst in Derby and Burton, it took a lot longer for unemployment to drop and the local property market didn’t really start to get going until 2013.

If we have a determined economic contraction, with a lengthier and leisurely economic recovery, impeded by financial stress, that will lead to much higher unemployment in the 10% to 12% range in the summer of 2021. However, before I get to the initial question, I need to highlight another interesting fact, because what is particularly interesting is that the increase in unemployment in Burton amongst men has been higher than women, with a growth of 3.5 percentage points for men compared to 2.4 percentage points with women.


What Next?

So, what is the prediction for our local property market under the cloud of this growth in unemployment?

One massive redeeming factor that could just save the property market is low interest rates. This will keep mortgage payments low, meaning repossessions should be kept to a minimum so there shouldn’t be a flood of cheaply priced properties coming onto the market all at the same time and dragging local house prices down with it, as it did in the previous two recessions of 2009 and 1989.

Yet, irrespective of the ultra-low interest rates, I still consider property prices in Derby and Burton at Christmas 2021 won’t be much different from today, and in fact could be slightly lower.

This is because people have been paying top dollar in the last six months to secure their dream home, quite often spending the money they saved on Stamp Duty on the purchase price. When Stamp Duty Tax returns in April 2021 (unless Rishi has a change of heart), there will be less money to pay for the property… thus property values will be, by implication, lower in a year’s time.


What about landlords and the rents?

Nationally, rents fell just over 2.3% between 2008 and 2010, following the Credit Crunch, while national house prices fell 15.9%. I anticipate our rents will also remain comparatively robust in the coming months and years.

Rents are very much tied to the rise and fall of wage growth and I can’t see why this relationship shouldn’t continue. Rents will rise in Derby and Burton by between 13% and 15% in the next five years, yet if property prices do rise in 2023/24, that means future rental yields will be marginally lower in 2023/24 compared to today, especially as ultra-low interest rate expectations, according to the money markets, seem to be here to stay for a long time.

Therefore, something tells me there could be some interesting buy-to-let investment opportunities for investors willing to play the property investment market for the long term.

To conclude, these are just my personal opinions.

If you are a landlord looking for advice and opinion on what to buy to maximise your returns, please don’t hesitate to contact our expert lettings team on 01332 300172.

If you are a homeowner looking to buy or sell and need any advice or an opinion on where the market is and where your home sits in the bigger property market picture – again feel free to call our sales team on 01332 300130.