martina fazio and gary harper
During recessions, and indeed pandemics, house prices often fall. However, between March 2020 and December 2021 (“the pandemic”), house prices rose in the UK, reaching then their highest growth rate in a decade. During this pandemic, many more people would be able to work from home, potentially influencing their housing choices. In a recent Financial Stability Document, we analyze how changes in people’s preferences might have influenced house price growth. We found that about half of the growth in house prices was linked to changes in preferences. This was mainly due to a higher premium paid for houses over apartments, with changes in location preferences only contributing marginally. But other interventions and macroeconomic factors also affected house price growth.
Changes in UK property market trends since the start of the pandemic
To analyze trends in housing markets during the pandemic, we examined differences in house price growth rates in different regions of the UK, as well as across different types of housing (such as apartments vs. detached houses, attached or attached).
First, house prices continued to grow in all regions of the UK during the pandemic. But prices grew fastest in regions outside of London, especially in the north of England, as well as Wales and Scotland (Figure 1).
Figure 1: From the start of the pandemic to the end of 2021, house prices grew faster in the North and West than in the South and London
12-month average home price growth from March 2020 to December 2021
Sources: ONS and authors’ calculations.
Prices for all types of housing grew rapidly after the pandemic began, but house prices grew faster than fixed prices.
These trends are not entirely new: higher growth rates for house prices rather than apartments, and in regions other than London, have been observed since around 2017 (Chart 1a and 1b). Furthermore, they are independent: the slower growth in London is not simply the result of a higher proportion of flats there.
Charts 1a and 1b: Stronger house price growth outside London and for houses rather than flats pre-pandemic
Year-on-year growth rates of house prices across the UK, by region and type of house
Sources: ONS and authors’ calculations.
Did household housing preferences change during the pandemic?
During the pandemic, the media reported on a ‘race for space’ narrative, suggesting a greater demand for larger houses away from city centers. To test whether this theory holds up in the data, we recreated a version of the Office for National Statistics house price index and calculated what the growth rate would have been if preferences stayed the same as before the pandemic.
To do this, we combine three data sets that give us information on all housing transactions in England and Wales between 2010 and 2021, including prices paid, detailed property characteristics, as well as local authority district characteristics. where each property is located
following the ONS methodologywe run ‘hedonic regressions’ in each month of data. These can be used to decompose the price of a property into the value that households place on its observable characteristics, such as the number of rooms, the size of the floor, the type of property (flat, semi-detached, semi-detached, or semi-detached), and whether the property is new. build.
For example, if we compare a flat and a single-family home on the same street with very similar characteristics (number of rooms, size of the flat, etc.), the single-family home tends to sell more expensive since households tend to value houses more than others. floors. Similarly, if you are faced with two identical properties, but one is in the south of England and the other in the north, the property in the south usually sells for more. The ‘race for space’ story suggests that the value normally placed on certain features, such as property type, size and location, may have changed during the pandemic.
We use the coefficients from each monthly regression, along with information on the relevant mix of properties traded to calculate the price of a ‘typical’ property sold in each month. From this we can derive an index and associated growth rate, which largely follow the ONS series. But they are more volatile than those of the ONS, which is why we smoothed our series (Graph 2).
Graph 2: The HPI and growth rates produced by our model broadly followed those produced by the ONS
HPI and growth rates produced by our analysis compared to the ONS series
Sources: Department of Planning, Housing and Communities, Property Registry of SM, ONS and calculations by the authors.
Were changes in housing preference during the pandemic associated with rapid price growth?
According to the ‘race for space’ narrative, households may have increased their willingness to pay for houses outside of busy city centers rather than flats in densely populated areas such as London. Also, some of the growth in house prices in 2021 could have been mechanically driven by changes in the types of properties households were buying in 2020. This is because the ONS blend adjusts its calculation to take into account the purchasing habits of households, but it recalculates the mix every year.
According to our calculations, just under 50% of the rapid growth in house prices during the pandemic is associated with changes in buying habits, a higher premium paid on houses over flats and a reduction in the discount on properties outside of London. We have not found a clear pattern for any of the other housing characteristics in our model, such as floor size or number of rooms. And while the premium paid for houses outside London increased, we did not find a corresponding reduction in the willingness to pay for flats in London, which remained roughly constant throughout the period.
In addition, the importance of the factors we control for varied throughout the pandemic (Graph 3). The increase in the premium on houses relative to flats is the largest and most consistent contributor, while the reduction in the discount on non-London properties played a minor role and was only positively correlated with growth rates between January and August 2021. Outside of this period, the discount increased slightly on average across all regions compared to before the pandemic. Alongside these factors, changes in shopping habits play a small but constant role throughout 2021.
Chart 3: Our analysis suggests that the premium increase for property types other than flats played an important role
Effect of different factors on house price growth since the pandemic began
Sources: Department of Planning, Housing and Communities, Property Registry of SM, ONS and calculations by the authors.
Other factors likely influenced house price growth during the pandemic
During the pandemic, technology made remote work feasible in many industries, so more people could work from home. This may have altered both the type of housing people are looking for and the total amount they were willing to spend on housing. compared to other goods and services. Our analysis focuses specifically on the former and how changes in household preferences can affect house price growth. But other factors, some standard and some related to the pandemic, also affected house price growth at the same time.
On the demand side, both the monetary policy environment and government support for household income may have supported housing demand. On the supply side, construction came to a standstill at the start of the pandemic, which may have contributed to price pressures, but this was short-lived. While relevant, all of these forces tend to put uniform pressure on house prices, unlike the relative changes in the prices of different types of properties that we have seen in the pandemic.
Some pandemic-specific factors also affected the housing market, in ways that could more easily induce or mimic a shift in preferences. First, due to limited possibilities to spend on recreation, the wealthiest households in particular accumulated ‘forced’ savings, which they may have channeled into the real estate market. Second, government interventions to reduce the Land Tax rate of the Tax on Documented Legal Acts directly supported demand for housing, with the largest savings accruing for transactions of around £500,000. Both factors are likely to have supported the shift in preferences that we are seeing.
We don’t think shifting preferences will keep driving house price growth forever
This work offers a new framework to analyze the role of changes in preferences in explaining house price growth. The particular change we are looking at could be transitory if, for example, the trend of working from home reverses, causing house price growth to reverse. But the change may be structural, for example, hybrid forms of work may persist, in which case we would not expect price growth to reverse completely due to a change in preferences. That said, we also don’t expect continued upward pressure on house prices from the shift in preferences. The pressure we saw likely eased once households adjusted their housing options upon moving. In any case, other more traditional macroeconomic and business cycle factors, along with longer-term supply-side considerations, will continue to drive house prices well beyond the effects of the pandemic.
Martina Fazio and Gary Harper work in the Bank’s Financial Strategy and Risk Division.
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