Martina Fazio and Gary Harper
Throughout recessions, and certainly pandemics, housing costs normally fall. But between March 2020 and December 2021 (‘the pandemic’), housing costs grew within the UK, reaching on the time their highest progress price in a decade. Throughout this pandemic, many extra individuals might work at home, which probably influenced their housing selections. In a latest Monetary Stability paper, we analyse how adjustments in peoples’ preferences may need performed into home worth progress. We discover that about half the expansion in housing costs was linked to shifts in preferences. This was largely as a result of an elevated premium paid for homes over flats, with adjustments in location preferences solely contributing marginally. However different interventions and macroeconomic components additionally affected housing worth progress.
Modifications within the UK housing market developments for the reason that begin of the pandemic
To analyse developments within the housing markets through the pandemic, we look at variations in progress charges of housing costs throughout totally different areas of the UK, in addition to throughout several types of housing (corresponding to flats versus indifferent, semi-detached or terraced homes).
First, housing costs continued to develop throughout all UK areas by means of the pandemic. However costs grew quicker in areas exterior London, particularly within the North of England, in addition to Wales and Scotland (Determine 1).
Determine 1: From the beginning of the pandemic to the top of 2021, housing costs grew extra quickly within the North and West than within the South and London
Common 12-month housing worth progress from March 2020 to December 2021
Sources: ONS and authors’ calculations.
Costs of all housing sorts grew quickly after the pandemic began, however home costs grew extra rapidly than flat costs.
These developments usually are not utterly new: greater progress charges for the costs of homes quite than flats, and in areas apart from London has been seen since round 2017 (Chart 1a and 1b). What’s extra, they’re unbiased: the slower progress in London will not be merely the results of the next proportion of flats there.
Chart 1a and 1b: The upper housing worth progress exterior of London and for homes quite than flats pre-dated the pandemic
12 months-on-year progress charges of property costs throughout the UK, by areas and housing sorts
Sources: ONS and authors’ calculations.
Did family preferences for housing shift through the pandemic?
Through the pandemic, the media reported on a ‘race for area’ narrative, suggesting elevated demand for larger homes away from metropolis centres. To examine if this concept holds within the information, we recreate a model of the Workplace for Nationwide Statistic’s Home Worth Index and compute what the expansion price would have been if preferences remained the identical as pre-pandemic.
To do that, we mix three information units giving us info on all housing transactions in England and Wales between 2010 and 2021, together with costs paid, detailed property traits, in addition to options of the Native Authority District the place every property is situated.
Following the ONS’s methodology, we run ‘hedonic regressions’ on every month of knowledge. These can be utilized to decompose the worth of a property into the worth households place on its observable traits, corresponding to variety of rooms, flooring dimension, property kind (flat, terraced, semi or indifferent home), and whether or not the property is a brand new construct.
For instance, if we examine a flat and a indifferent home on the identical road with very related traits (variety of rooms, flooring dimension and so forth), the indifferent home normally sells for extra as households sometimes worth homes extra extremely than flats. Equally, if confronted with two an identical properties, however one occurs to be within the South of England and the opposite within the North, the property within the South sometimes sells for extra. The ‘race for area’ story means that the worth that’s sometimes attributed to sure traits, corresponding to property kind, dimension and placement, might have modified through the pandemic.
We use the coefficients from every month-to-month regression, along with info on the related mixture of properties transacted to compute the worth of a ‘typical’ property bought in every month. From this we are able to derive an index and related progress price, each of which largely monitor the ONS’s sequence. However they’re extra risky than the ONS’s, so we easy our sequence (Chart 2).
Chart 2: The HPI and progress charges produced by our mannequin broadly tracked these produced by the ONS
HPI and progress charges produced by our evaluation in comparison with the ONS sequence
Sources: Division for Levelling Up, Housing and Communities, HM Land Registry, ONS and authors’ calculations.
Have been adjustments in housing desire through the pandemic related to fast worth progress?
In line with the ‘race for area’ narrative, households might have elevated their willingness to pay for homes exterior of busy metropolis centres as an alternative of flats in densely populated areas corresponding to London. Additionally, a number of the progress in housing costs in 2021 might have been mechanically pushed by adjustments within the kinds of properties households had been shopping for in 2020. It is because the ONS combine adjusts its calculation to bear in mind family shopping for habits, but it surely recalculates the combo yearly.
From our calculations, just below 50% of the fast housing worth progress through the pandemic is related to adjustments in shopping for habits, an elevated premium paid on homes over flats, and a discount within the low cost on properties exterior of London. We now have not discovered a transparent sample for any of the opposite housing traits in our mannequin, corresponding to flooring dimension or variety of rooms. And whereas the premium paid on homes exterior of London elevated, we don’t discover a corresponding discount within the willingness to pay for residences in London, which remained roughly fixed all through the interval.
Moreover, the significance of the components we management for various over the course of the pandemic (Chart 3). The elevated premium on homes relative to flats is crucial and constant contributor, whereas the diminished low cost on properties exterior of London performed a smaller position and was solely positively correlated with progress charges between January and August 2021. Outdoors of this era, the low cost elevated barely on common throughout areas in comparison with pre-pandemic. Alongside these components, adjustments in shopping for habits play a small however constant position all through the entire of 2021.
Chart 3: Our evaluation suggests an elevated premium for property sorts apart from flats performed an necessary position
Impact of various components on housing worth progress for the reason that pandemic began
Sources: Division for Levelling Up, Housing and Communities, HM Land Registry, ONS and authors’ calculations.
Different components are more likely to have influenced housing worth progress through the pandemic
Through the pandemic, expertise made distant working possible in lots of sectors, so extra individuals might work at home. This will likely have altered each the kind of housing that folks search for and the whole quantity they had been prepared to spend on housing in comparison with different items and providers. Our evaluation is particularly targeted on the previous and the way adjustments in households’ preferences might have an effect on progress in housing costs. However different components, some customary and a few pandemic-related, additionally affected housing worth progress on the similar time.
On the demand facet, each the financial coverage surroundings and authorities assist to family earnings might have sustained housing demand. On the provision facet, building got here to a halt in the beginning of the pandemic, which can have contributed to cost pressures, however this was short-lived. Whereas related, all these forces are likely to put uniform strain on housing costs, otherwise from the relative shifts in pricing throughout several types of property that we noticed within the pandemic.
Some pandemic-specific components additionally affected the housing market, in ways in which might extra simply induce or mimic a shift in preferences. First, as a result of restricted prospects to spend on recreation, wealthier households particularly gathered ‘compelled’ financial savings, which they could have channelled into the housing market. Second, authorities interventions to scale back the speed of Stamp Responsibility Land Tax straight supported housing demand, with the most important financial savings accrued for transactions round £500,000. Each these components are more likely to have supported the change in preferences we noticed.
We don’t suppose the change in preferences will proceed to spice up housing worth progress without end
This work gives a brand new framework for analysing the position of adjustments in preferences for explaining housing worth progress. The actual shift we checked out could possibly be transitory, if for instance the development for working from house reverses, inflicting housing worth progress to unwind. However the shift is likely to be structural, for instance hybrid types of work might persist, by which case we’d not anticipate worth progress to utterly unwind due to a reversal in preferences. That mentioned, we don’t anticipate continued upwards strain on housing costs from the shift in preferences both. The strain we noticed in all probability subsided as soon as households adjusted their housing selections by shifting. In both case, different, extra conventional macroeconomic and enterprise cycle associated components, alongside long-term provide facet concerns will proceed to drive housing costs nicely past the results of the pandemic.
Martina Fazio and Gary Harper work within the Financial institution’s Monetary Technique and Danger Division.
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