Martina Fazio and Gary Harper
During recessions, and indeed pandemics, housing prices usually fall. Yet between March 2020 and December 2021 (‘the pandemic’), housing prices grew in the UK, reaching at the time their highest growth rate in a decade. During this pandemic, many more people could work from home, which potentially influenced their housing choices. In a recent Financial Stability paper, we analyse how changes in peoples’ preferences might have played into house price growth. We find that about half the growth in housing prices was linked to shifts in preferences. This was mostly due to an increased premium paid for houses over flats, with changes in location preferences only contributing marginally. But other interventions and macroeconomic factors also affected housing price growth.
Changes in the UK housing market trends since the start of the pandemic
To analyse trends in the housing markets during the pandemic, we examine differences in growth rates of housing prices across different regions of the UK, as well as across different types of housing (such as flats versus detached, semi-detached or terraced houses).
First, housing prices continued to grow across all UK regions through the pandemic. But prices grew faster in regions outside 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, housing prices grew more rapidly in the North and West than in the South and London
Average 12-month housing price growth from March 2020 to December 2021
Sources: ONS and authors’ calculations.
Prices of all housing types grew rapidly after the pandemic started, but house prices grew more quickly than flat prices.
These trends are not completely new: higher growth rates for the prices of houses rather than flats, and in regions other than London has been seen since around 2017 (Chart 1a and 1b). What’s more, they are independent: the slower growth in London is not simply the result of a higher proportion of flats there.
Chart 1a and 1b: The higher housing price growth outside of London and for houses rather than flats pre-dated the pandemic
Year-on-year growth rates of property prices across the UK, by regions and housing types
Sources: ONS and authors’ calculations.
Did household preferences for housing shift during the pandemic?
During the pandemic, the media reported on a ‘race for space’ narrative, suggesting increased demand for bigger houses away from city centres. To check if this theory holds in the data, we recreate a version of the Office for National Statistic’s House Price Index and compute what the growth rate would have been if preferences remained the same as pre-pandemic.
To do this, we combine three data sets giving us information on all housing transactions in England and Wales between 2010 and 2021, including prices paid, detailed property characteristics, as well as features of the Local Authority District where each property is located.
Following the ONS’s methodology, we run ‘hedonic regressions’ on each month of data. These can be used to decompose the price of a property into the value households place on its observable characteristics, such as number of rooms, floor size, property type (flat, terraced, semi or detached house), and whether the property is a new build.
For example, if we compare a flat and a detached house on the same street with very similar characteristics (number of rooms, floor size etc), the detached house usually sells for more as households typically value houses more highly than flats. Similarly, if faced with two identical properties, but one happens to be in the South of England and the other in the North, the property in the South typically sells for more. The ‘race for space’ story suggests that the value that is typically attributed to certain characteristics, such as property type, size and location, may have changed during the pandemic.
We use the coefficients from each monthly regression, together with information on the relevant mix of properties transacted to compute the price of a ‘typical’ property sold in each month. From this we can derive an index and associated growth rate, both of which largely track the ONS’s series. But they are more volatile than the ONS’s, so we smooth our series (Chart 2).
Chart 2: The HPI and growth rates produced by our model broadly tracked those produced by the ONS
HPI and growth rates produced by our analysis compared to the ONS series
Sources: Department for Levelling Up, Housing and Communities, HM Land Registry, ONS and authors’ calculations.
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 centres instead of flats in densely populated areas such as London. Also, some of the growth in housing 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 mix adjusts its calculation to take into account household buying habits, but it recalculates the mix every year.
From our calculations, just under 50% of the rapid housing price growth during the pandemic is associated with changes in buying habits, an increased 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 on houses outside of London increased, we do not find a corresponding reduction in the willingness to pay for flats in London, which remained approximately constant throughout the period.
Additionally, the importance of the factors we control for varied over the course of the pandemic (Chart 3). The increased premium on houses relative to flats is the most important and consistent contributor, while the reduced discount on properties outside of London played a smaller 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 regions compared to pre-pandemic. Alongside these factors, changes in buying habits play a small but consistent role throughout the whole of 2021.
Chart 3: Our analysis suggests an increased premium for property types other than flats played an important role
Effect of different factors on housing price growth since the pandemic started
Sources: Department for Levelling Up, Housing and Communities, HM Land Registry, ONS and authors’ calculations.
Other factors are likely to have influenced housing price growth during the pandemic
During the pandemic, technology made remote working feasible in many sectors, so more people could work from home. This may have altered both the type of housing that people look for and the total amount they were willing to spend on housing compared to other goods and services. Our analysis is specifically focused on the former and how changes in households’ preferences may affect growth in housing prices. But other factors, some standard and some pandemic-related, also affected housing price growth at the same time.
On the demand side, both the monetary policy environment and government support to household income may have sustained housing demand. On the supply side, construction came to a halt at the start of the pandemic, which may have contributed to price pressures, but this was short-lived. While relevant, all these forces tend to put uniform pressure on housing prices, differently from the relative shifts in pricing across different types of property that we saw 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, wealthier households in particular accumulated ‘forced’ savings, which they may have channelled into the housing market. Second, government interventions to reduce the rate of Stamp Duty Land Tax directly supported housing demand, with the largest savings accrued for transactions around £500,000. Both these factors are likely to have supported the change in preferences we observed.
We do not think the change in preferences will continue to boost housing price growth forever
This work offers a new framework for analysing the role of changes in preferences for explaining housing price growth. The particular shift we looked at could be transitory, if for example the trend for working from home reverses, causing housing price growth to unwind. But the shift might be structural, for example hybrid forms of work may persist, in which case we would not expect price growth to completely unwind because of a reversal in preferences. That said, we do not expect continued upwards pressure on housing prices from the shift in preferences either. The pressure we saw probably subsided once households adjusted their housing choices by moving. In either case, other, more traditional macroeconomic and business cycle related factors, alongside long-term supply side considerations will continue to drive housing 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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