Martina Fazio and Gary Harper
Throughout recessions, and certainly pandemics, housing costs often fall. But between March 2020 and December 2021 (‘the pandemic’), housing costs grew within the UK, reaching on the time their highest development fee in a decade. Throughout this pandemic, many extra folks might make money working from home, which doubtlessly influenced their housing decisions. In a latest Monetary Stability paper, we analyse how modifications in peoples’ preferences might need performed into home worth development. We discover that about half the expansion in housing costs was linked to shifts in preferences. This was principally because of an elevated premium paid for homes over flats, with modifications in location preferences solely contributing marginally. However different interventions and macroeconomic components additionally affected housing worth development.
Adjustments within the UK housing market tendencies for the reason that begin of the pandemic
To analyse tendencies within the housing markets through the pandemic, we study variations in development charges of housing costs throughout completely different areas of the UK, in addition to throughout several types of housing (reminiscent of flats versus indifferent, semi-detached or terraced homes).
First, housing costs continued to develop throughout all UK areas via the pandemic. However costs grew sooner in areas outdoors 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 tip of 2021, housing costs grew extra quickly within the North and West than within the South and London
Common 12-month housing worth development 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 tendencies should not utterly new: increased development charges for the costs of homes moderately 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 development in London isn’t merely the results of the next proportion of flats there.
Chart 1a and 1b: The upper housing worth development outdoors of London and for homes moderately than flats pre-dated the pandemic
Yr-on-year development 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?
Throughout 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 knowledge, we recreate a model of the Workplace for Nationwide Statistic’s Home Worth Index and compute what the expansion fee would have been if preferences remained the identical as pre-pandemic.
To do that, we mix three knowledge units giving us data 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 positioned.
Following the ONS’s methodology, we run ‘hedonic regressions’ on every month of knowledge. These can be utilized to decompose the value of a property into the worth households place on its observable traits, reminiscent of variety of rooms, ground dimension, property sort (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 avenue with very related traits (variety of rooms, ground dimension and many others), the indifferent home often sells for extra as households sometimes worth homes extra extremely than flats. Equally, if confronted with two equivalent 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, reminiscent of property sort, dimension and site, might have modified through the pandemic.
We use the coefficients from every month-to-month regression, along with data on the related mixture of properties transacted to compute the value of a ‘typical’ property bought in every month. From this we are able to derive an index and related development fee, each of which largely monitor the ONS’s collection. However they’re extra unstable than the ONS’s, so we easy our collection (Chart 2).
Chart 2: The HPI and development charges produced by our mannequin broadly tracked these produced by the ONS
HPI and development charges produced by our evaluation in comparison with the ONS collection
Sources: Division for Levelling Up, Housing and Communities, HM Land Registry, ONS and authors’ calculations.
Have been modifications in housing desire through the pandemic related to speedy worth development?
In line with the ‘race for area’ narrative, households might have elevated their willingness to pay for homes outdoors of busy metropolis centres as an alternative of flats in densely populated areas reminiscent of London. Additionally, a few of the development in housing costs in 2021 might have been mechanically pushed by modifications within the varieties of properties households have been shopping for in 2020. It is because the ONS combine adjusts its calculation to have in mind family shopping for habits, nevertheless it recalculates the combo yearly.
From our calculations, just below 50% of the speedy housing worth development through the pandemic is related to modifications in shopping for habits, an elevated premium paid on homes over flats, and a discount within the low cost on properties outdoors of London. Now we have not discovered a transparent sample for any of the opposite housing traits in our mannequin, reminiscent of ground dimension or variety of rooms. And whereas the premium paid on homes outdoors 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 lowered low cost on properties outdoors of London performed a smaller position and was solely positively correlated with development 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, modifications 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 development for the reason that pandemic began
Sources: Division for Levelling Up, Housing and Communities, HM Land Registry, ONS and authors’ calculations.
Different components are prone to have influenced housing worth development through the pandemic
Throughout the pandemic, know-how made distant working possible in lots of sectors, so extra folks might make money working from home. This may occasionally have altered each the kind of housing that folks search for and the entire quantity they have been keen to spend on housing in comparison with different items and providers. Our evaluation is particularly targeted on the previous and the way modifications in households’ preferences might have an effect on development in housing costs. However different components, some commonplace and a few pandemic-related, additionally affected housing worth development on the similar time.
On the demand facet, each the financial coverage setting and authorities help to family revenue might have sustained housing demand. On the availability facet, building got here to a halt at the beginning of the pandemic, which can have contributed to cost pressures, however this was short-lived. Whereas related, all these forces are inclined to put uniform stress on housing costs, in a different way 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, because of restricted potentialities to spend on recreation, wealthier households particularly accrued ‘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 biggest financial savings accrued for transactions round £500,000. Each these components are prone to have supported the change in preferences we noticed.
We don’t assume the change in preferences will proceed to spice up housing worth development eternally
This work gives a brand new framework for analysing the position of modifications in preferences for explaining housing worth development. The actual shift we checked out might be transitory, if for instance the pattern for working from dwelling reverses, inflicting housing worth development to unwind. However the shift may be structural, for instance hybrid types of work might persist, during which case we’d not count on worth development to utterly unwind due to a reversal in preferences. That mentioned, we don’t count on continued upwards stress on housing costs from the shift in preferences both. The stress we noticed most likely subsided as soon as households adjusted their housing decisions by transferring. In both case, different, extra conventional macroeconomic and enterprise cycle associated components, alongside long-term provide facet issues 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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