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 development price in a decade. Throughout this pandemic, many extra individuals may do business from home, which doubtlessly influenced their housing decisions. In a latest Monetary Stability paper, we analyse how adjustments in peoples’ preferences may need performed into home value development. We discover that about half the expansion in housing costs was linked to shifts in preferences. This was largely on account 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 value development.
Adjustments within the UK housing market developments because the begin of the pandemic
To analyse developments within the housing markets in the course of the pandemic, we look at variations in development charges of housing costs throughout totally different areas of the UK, in addition to throughout various kinds of housing (akin to flats versus indifferent, semi-detached or terraced homes).
First, housing costs continued to develop throughout all UK areas by way of the pandemic. However costs grew quicker 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 top of 2021, housing costs grew extra quickly within the North and West than within the South and London
Common 12-month housing value development from March 2020 to December 2021
Sources: ONS and authors’ calculations.
Costs of all housing varieties grew quickly after the pandemic began, however home costs grew extra rapidly than flat costs.
These developments should not fully new: increased development charges for the costs of homes relatively than flats, and in areas aside from London has been seen since round 2017 (Chart 1a and 1b). What’s extra, they’re impartial: the slower development in London is just not merely the results of a better proportion of flats there.
Chart 1a and 1b: The upper housing value development outdoors of London and for homes relatively than flats pre-dated the pandemic
12 months-on-year development charges of property costs throughout the UK, by areas and housing varieties
Sources: ONS and authors’ calculations.
Did family preferences for housing shift in the course of 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 test if this principle holds within the information, we recreate a model of the Workplace for Nationwide Statistic’s Home Value 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 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 information. These can be utilized to decompose the worth of a property into the worth households place on its observable traits, akin to 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 evaluate a flat and a indifferent home on the identical road with very comparable traits (variety of rooms, ground dimension and many others), the indifferent home normally sells for extra as households usually 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 usually sells for extra. The ‘race for area’ story means that the worth that’s usually attributed to sure traits, akin to property sort, dimension and site, might have modified in the course of 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 worth of a ‘typical’ property offered in every month. From this we will derive an index and related development price, each of which largely observe the ONS’s sequence. However they’re extra unstable than the ONS’s, so we clean our sequence (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 sequence
Sources: Division for Levelling Up, Housing and Communities, HM Land Registry, ONS and authors’ calculations.
Had been adjustments in housing desire in the course of the pandemic related to fast value development?
In accordance with the ‘race for area’ narrative, households might have elevated their willingness to pay for homes outdoors of busy metropolis centres as a substitute of flats in densely populated areas akin to London. Additionally, among the development in housing costs in 2021 may have been mechanically pushed by adjustments within the kinds of properties households have been shopping for in 2020. It’s because the ONS combine adjusts its calculation to keep in mind family shopping for habits, nevertheless it recalculates the combo yearly.
From our calculations, just below 50% of the fast housing value development in the course of 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 outdoors of London. We’ve not discovered a transparent sample for any of the opposite housing traits in our mannequin, akin to 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 studios 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 an important and constant contributor, whereas the diminished low cost on properties outdoors of London performed a smaller position and was solely positively correlated with development charges between January and August 2021. Exterior 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 varieties aside from flats performed an necessary position
Impact of various components on housing value development because the 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 value development in the course of the pandemic
Through the pandemic, expertise made distant working possible in lots of sectors, so extra individuals may do business from home. This may increasingly have altered each the kind of housing that folks search for and the full quantity they have been prepared to spend on housing in comparison with different items and companies. Our evaluation is particularly centered on the previous and the way adjustments in households’ preferences might have an effect on development in housing costs. However different components, some customary and a few pandemic-related, additionally affected housing value development on the similar time.
On the demand aspect, each the financial coverage surroundings and authorities assist to family earnings might have sustained housing demand. On the provision aspect, building got here to a halt at first 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, in another way from the relative shifts in pricing throughout various kinds of property that we noticed within the pandemic.
Some pandemic-specific components additionally affected the housing market, in ways in which may extra simply induce or mimic a shift in preferences. First, on account of restricted prospects to spend on recreation, wealthier households specifically accrued ‘pressured’ financial savings, which they could have channelled into the housing market. Second, authorities interventions to scale back the speed of Stamp Obligation Land Tax immediately 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 value development ceaselessly
This work affords a brand new framework for analysing the position of adjustments in preferences for explaining housing value development. The actual shift we checked out could possibly be transitory, if for instance the pattern for working from dwelling reverses, inflicting housing value development to unwind. However the shift may be structural, for instance hybrid types of work might persist, wherein case we’d not anticipate value development to fully unwind due to a reversal in preferences. That stated, we don’t anticipate continued upwards strain on housing costs from the shift in preferences both. The strain we noticed most likely subsided as soon as households adjusted their housing decisions by shifting. In both case, different, extra conventional macroeconomic and enterprise cycle associated components, alongside long-term provide aspect issues will proceed to drive housing costs properly past the results of the pandemic.
Martina Fazio and Gary Harper work within the Financial institution’s Monetary Technique and Threat Division.
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