Location, location, location? How UK housing preferences shifted during the pandemic – Bank Underground

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 folks might earn a living from home, which probably influenced their housing decisions. In a current Monetary Stability paper, we analyse how adjustments in peoples’ preferences may 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 because 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 tendencies because the begin of the pandemic

To analyse tendencies 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 various kinds of housing (comparable to flats versus indifferent, semi-detached or terraced homes).

First, housing costs continued to develop throughout all UK areas by 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 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 tendencies are usually not fully new: increased progress charges for the costs of homes somewhat than flats, and in areas aside 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 the next proportion of flats there.

Chart 1a and 1b: The upper housing value progress outdoors of London and for homes somewhat 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?

Throughout 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 idea 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 knowledge. These can be utilized to decompose the value of a property into the worth households place on its observable traits, comparable to variety of rooms, ground dimension, property kind (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 avenue with very related traits (variety of rooms, ground dimension and so on), the indifferent home normally sells for extra as households usually worth homes extra extremely than flats. Equally, if confronted with two similar 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 kind, 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 offered 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 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 desire through the pandemic related to speedy value progress?

In keeping 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 comparable to London. Additionally, a number of the progress in housing costs in 2021 might have been mechanically pushed by adjustments within the forms of properties households had 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, slightly 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 outdoors of London. We’ve not discovered a transparent sample for any of the opposite housing traits in our mannequin, comparable 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 diverse 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 function 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 function all through the entire of 2021. 

Chart 3: Our evaluation suggests an elevated premium for property sorts aside from flats performed an necessary function
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 more likely to have influenced housing value progress through the pandemic

Throughout the pandemic, know-how made distant working possible in lots of sectors, so extra folks might earn a living from home. This will likely have altered each the kind of housing that individuals search for and the overall quantity they had been prepared to spend on housing in comparison with different items and providers. Our evaluation is particularly centered 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 aspect, each the financial coverage surroundings and authorities help to family earnings might have sustained housing demand. On the availability aspect, development got here to a halt initially 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 a different 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 might extra simply induce or mimic a shift in preferences. First, because of restricted potentialities to spend on recreation, wealthier households specifically accrued ‘pressured’ financial savings, which they could have channelled into the housing market. Second, authorities interventions to cut 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 value progress eternally

This work provides a brand new framework for analysing the function of adjustments in preferences for explaining housing value progress. The actual shift we checked out might be transitory, if for instance the development for working from dwelling reverses, inflicting housing value progress to unwind. However the shift could be structural, for instance hybrid types of work might persist, through which case we’d not anticipate value progress 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 transferring. In both case, different, extra conventional macroeconomic and enterprise cycle associated components, alongside long-term provide aspect concerns will proceed to drive housing costs nicely past the consequences of the pandemic.

Martina Fazio and Gary Harper work within the Financial institution’s Monetary Technique and Danger Division.

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