We’re living in a time of unprecedented economic instability and uncertainty. The cost of living crisis is affecting everything and everyone, with rising inflation leading to skyrocketing prices for both energy and household items. As we face ever-increasing energy prices, people are having to tighten their purse strings and live more frugally.
The economy is deeply interconnected, rising prices in particular sectors will have knock-on effects elsewhere. Are soaring energy prices affecting the residential property market? Let’s find out.
Why are energy prices rising?
Before we can examine how rising energy prices might be affecting the residential property market, it’s important we clarify why exactly energy bills are increasing in the first place.
Energy companies buy gas and electricity wholesale before selling it on to their customers. The wholesale price of these energy sources has been steadily rising since 2021, leading energy companies to charge more in an attempt to recoup their losses.
However, that’s not the sole reason behind our rising bills. Markets are incredibly unpredictable and can be influenced by a whole manner of both internal and external factors. Often, it is large-scale geopolitical events that can have a trickle down effect and end up costing the consumer.
The war in Ukraine is having a serious impact on energy prices in the UK, by causing massive disruption to lines that supply much of Europe. As the war continues, we can expect to see prices remain high or even increase further.
The state of the housing market
The housing market, like all markets, can be volatile and difficult to predict. We’ve seen house prices increase significantly over the past few years, making it harder and harder for people to get a foot on the property ladder. According to research by the Office for National Statistics, the average price for a house in the UK was £295,000 as of November 2022, £28,000 higher than just 12 months previously.
However, this price rise started long before the energy crisis, so what caused it? One major influencing factor was the Stamp Duty Holiday, where the government cut the amount of tax owed when buying a property. This lead to an increase in people buying houses as they looked to take advantage of this tax benefit, which resulted in a price increase.
Another primary reason behind the high housing prices is that the UK has a shortage of housing. The demand for houses is higher than the supply, which in turn drives up the price.
How are rising energy prices affecting the property market?
Despite rising prices, the property market is slowing down. This is due to rising interest rates and the increased cost of borrowing. However, soaring energy prices are also having an effect.
Generally, when people move home, they are moving to a larger property, often motivated by a growing family. With a larger property comes higher bills, including for a mortgage and energy. The cost of living crisis is forcing many of us to review and rethink our financial plans, large purchases are being put on hold and many people are just trying to get by for the time being.
What this means is that, with less demand, we could see residential property prices fall later in 2023. However, with interest and borrowing rates still high, this doesn’t necessarily mean people will be in a position to buy.
On the other hand, rising inflation and energy prices are also having an effect on the construction sector, with research indicating it is facing a slump similar to that seen at the height of the pandemic. This will put more pressure on an already stretched property market and could mean that prices will remain high despite a decrease in demand.
The residential property market is unpredictable and can take many unexpected twists and turns. Rising energy prices could well see prices fall, but this could be offset by reduced construction and a worsening of the UK housing shortage.