Location, location, location? How UK housing preferences shifted in the course of the pandemic – Financial institution Underground

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 doubtlessly influenced their housing decisions. In a latest Monetary Stability paper, we analyse how modifications 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 principally attributable to an elevated premium paid for homes over flats, with modifications in location preferences solely contributing marginally. However different interventions and macroeconomic elements additionally affected housing value progress.

Modifications within the UK housing market developments for the reason that begin of the pandemic

To analyse developments within the housing markets in the course of the pandemic, we study variations in progress charges of housing costs throughout completely different areas of the UK, in addition to throughout various kinds of housing (comparable to flats versus indifferent, semi-detached or terraced homes).

First, housing costs continued to develop throughout all UK areas via 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 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 aren’t utterly new: increased 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 will not be merely the results of a better proportion of flats there.

Chart 1a and 1b: The upper housing value progress outdoors 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 sorts

Sources: ONS and authors’ calculations.

Did family preferences for housing shift in the course of the pandemic?

In the course of the pandemic, the media reported on a ‘race for area’ narrative, suggesting elevated demand for greater 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 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 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 information. These can be utilized to decompose the worth of a property into the worth households place on its observable traits, comparable to 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 road with very comparable traits (variety of rooms, flooring dimension and many others), the indifferent home often sells for extra as households usually 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 usually sells for extra. The ‘race for area’ story means that the worth that’s usually attributed to sure traits, comparable to property sort, dimension and placement, could have modified in the course of 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 observe 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 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 modifications in housing choice in the course of the pandemic related to fast value progress?

Based on the ‘race for area’ narrative, households could have elevated their willingness to pay for homes outdoors of busy metropolis centres as an alternative of flats in densely populated areas comparable to London. Additionally, a number of the progress in housing costs in 2021 might have been mechanically pushed by modifications within the forms of properties households had been shopping for in 2020. It is because the ONS combine adjusts its calculation to take note of family shopping for habits, but it surely recalculates the combination yearly.

From our calculations, slightly below 50% of the fast housing value progress in the course of 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. We now have not discovered a transparent sample for any of the opposite housing traits in our mannequin, comparable to flooring 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 elements we management for diverse 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 outdoors 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 elements, 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 elements on housing value progress for the reason that pandemic began

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

Different elements are more likely to have influenced housing value progress in the course of the pandemic

In the course of the pandemic, know-how made distant working possible in lots of sectors, so extra folks might do business from home. This may occasionally have altered each the kind of housing that individuals search for and the full quantity they had been prepared to spend on housing in comparison with different items and companies. Our evaluation is particularly targeted on the previous and the way modifications in households’ preferences could have an effect on progress in housing costs. However different elements, some normal and a few pandemic-related, additionally affected housing value progress on the similar time.

On the demand facet, each the financial coverage setting and authorities help to family revenue could have sustained housing demand. On the availability facet, development 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 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 elements additionally affected the housing market, in ways in which might extra simply induce or mimic a shift in preferences. First, attributable to restricted prospects to spend on recreation, wealthier households specifically collected ‘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 straight supported housing demand, with the biggest financial savings accrued for transactions round £500,000. Each these elements are more likely to have supported the change in preferences we noticed.

We don’t assume the change in preferences will proceed to spice up housing value progress perpetually

This work affords a brand new framework for analysing the position of modifications in preferences for explaining housing value progress. The actual shift we checked out might be transitory, if for instance the pattern for working from dwelling reverses, inflicting housing value progress to unwind. However the shift may be structural, for instance hybrid types of work could persist, through which case we might not count on value progress to utterly unwind due to a reversal in preferences. That mentioned, we don’t count on 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 transferring. In both case, different, extra conventional macroeconomic and enterprise cycle associated elements, alongside long-term provide facet concerns will proceed to drive housing costs effectively 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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Feedback will solely seem as soon as accredited by a moderator, and are solely printed the place a full title is provided. Financial institution Underground is a weblog for Financial institution of England employees to share views that problem – or help – prevailing coverage orthodoxies. The views expressed listed here are these of the authors, and aren’t essentially these of the Financial institution of England, or its coverage committees.

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