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 progress price in a decade. Throughout this pandemic, many extra folks might do business from home, which probably influenced their housing decisions. In a current Monetary Stability paper, we analyse how adjustments in peoples’ preferences might need performed into home value progress. 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 progress.

Adjustments within the UK housing market traits because the begin of the pandemic

To analyse traits 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 (resembling 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 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 value progress 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 shortly than flat costs.

These traits should not utterly new: larger progress charges for the costs of homes relatively 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 shouldn’t be merely the results of a better proportion of flats there.

Chart 1a and 1b: The upper housing value progress exterior of London and for homes relatively than flats pre-dated the pandemic
12 months-on-year progress charges of property costs throughout the UK, by areas and housing varieties

Sources: ONS and authors’ calculations.

Did family preferences for housing shift through the pandemic?

In the course of the pandemic, the media reported on a ‘race for house’ narrative, suggesting elevated demand for greater homes away from metropolis centres. To test if this principle holds within the knowledge, 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 knowledge 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, resembling variety of rooms, flooring 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, flooring 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 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 house’ story means that the worth that’s sometimes attributed to sure traits, resembling property sort, dimension and site, 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 will derive an index and related progress price, each of which largely monitor the ONS’s collection. However they’re extra risky than the ONS’s, so we easy our collection (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 collection

Sources: Division for Levelling Up, Housing and Communities, HM Land Registry, ONS and authors’ calculations.

Have been adjustments in housing choice through the pandemic related to speedy value progress?

In keeping with the ‘race for house’ 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 resembling London. Additionally, a few of the progress in housing costs in 2021 might 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 bear in mind family shopping for habits, but it surely recalculates the combo yearly.

From our calculations, just below 50% of the speedy housing value 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 have now not discovered a transparent sample for any of the opposite housing traits in our mannequin, resembling 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 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 lowered low cost on properties exterior of London performed a smaller position and was solely positively correlated with progress 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 apart from flats performed an essential position
Impact of various components on housing value progress because the 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 value progress through the pandemic

In the course of the pandemic, expertise made distant working possible in lots of sectors, so extra folks might do business from home. This will likely have altered each the kind of housing that folks search for and the entire quantity they have been prepared to spend on housing in comparison with different items and companies. 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 value progress on the identical time.

On the demand facet, each the financial coverage setting and authorities assist to family revenue might have sustained housing demand. On the provision facet, building got here to a halt firstly 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 strain on housing costs, in another 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, on account of restricted potentialities to spend on recreation, wealthier households particularly accrued ‘pressured’ financial savings, which they could have channelled into the housing market. Second, authorities interventions to cut back the speed of Stamp Obligation Land Tax immediately 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 suppose the change in preferences will proceed to spice up housing value progress without end

This work presents a brand new framework for analysing the position of adjustments in preferences for explaining housing value progress. The actual shift we checked out may very well be transitory, if for instance the pattern for working from residence reverses, inflicting housing value progress to unwind. However the shift is perhaps structural, for instance hybrid types of work might persist, through which case we might not anticipate value 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 decisions by transferring. In both case, different, extra conventional macroeconomic and enterprise cycle associated components, alongside long-term provide facet concerns 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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