The relentless rise of house prices makes this an unusual recession
If you needed further evidence that we’re living in extremely strange times, you only have to look at house prices. For the past 10 months, the UK housing market has defied all economic logic, with prices rising to record levels and home sales booming, despite the largest contraction in economic activity Britain has seen in more than 300 years.
In every previous UK recession, house prices have slowed or fallen. But the past year has been different. Before the first lockdown in March 2020, demand among buyers had been strong but the lockdown effect of confining people to their homes for all but a few hours a day – and severely restricting what they could do when they were outside – gave people the time and space to re-evaluate their housing needs.
Before the pandemic, homes were, in many cases, functional places to live, a base to enable a busy family life to happen. But now they also need to be a place to work, to teach children, to entertain, to exercise and to enjoy leisure time. Space and gardens have become hugely important to buyers, with the price of detached dwellings rising a third faster than the price of flats.
Many have been helped in their goal for a larger property by a multitude of factors: the stamp duty holiday introduced last July, the extraordinary Government support for jobs and income, and of course, low borrowing costs for those with larger deposits.
Another important factor is the large amounts of savings many households have accumulated due to Covid-19 restrictions limited spending travel – either leisure or work – and social consumption.
We estimate that around £150bn in excess savings – that is, savings above normal levels – has built up in people’s savings and current accounts since the first lockdown.
Due to the nature of the Covid-19 recession, the housing market has also benefitted from the fact that home purchasers are typically from higher income groups. While the average full-time salary in the UK increased from £21,000 in the late 1990s to £38,600 in 2020, the average income of households purchasing a home with a mortgage has more than doubled from £30,000 to £64,770.
The shutdown of businesses that require face-to-face services, like hospitality, meant that job losses and reduction in incomes were concentrated in lower paid occupations. Meanwhile, employment in professional and office-based occupations, in which homeowners are more likely to be employed, has risen.
Household incomes and interest rates are key drivers of house prices, but other policy action is also important in understanding near-term market dynamics.
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The combination of pent-up demand from the first lockdown and buyers wanting take advantage of the stamp duty holiday bringing forward their property searches, provided an additional temporary boost to demand. Meanwhile, mortgage payment holidays and the ban on repossessions have prevented any rise in forced sales.
Besides demand, the low level of housing supply has further added upward pressure on prices. For much of the period since the 2007 financial crisis, the supply of homes for sale has not kept up with demand, a trend which has become more severe in the past year. According to Zoopla in the first half of April, the number of homes for sale was nearly 30 per cent lower than average during the same period in 2017 to 2019.
Their research also shows the share of family houses listed for sale has fallen to the lowest level in years, with three-bed homes accounting for just a quarter of homes available to buy, down from more than a third in 2017. In total, houses make up 59 per cent of listings, this year, down from 76 per cent in 2017.
Conversely, the proportion of flats for sale has risen, a trend which chimes with second-steppers looking to move from a flat into a house amid the ongoing race for space.
The rush to beat the June deadline continues to fuel demand and we expect June to be another big month, but after that we expect the market to cool as the tax relief is reduced from £500,000 to £250,000. This is likely to impact demand in high value areas such as the South East. Further slowdown in activity is expected when the tax saving is removed altogether at the end of September.
However, current activity is also being driven by buyers re-evaluating their housing needs, particularly for more space in less densely populated areas, which we believe will continue to be a driver for house purchases after the June and September deadlines.
Household balance sheets are continuing to improve with excess savings continuing to rise even with the gradual reopening since April. This, combined with households repaying £23bn of consumer credit in the same period, should support the housing market over the medium term as a result of greater financial confidence.
As for house prices, we expect annual growth rates will stay in the double-digits into the summer in and then to slow to around 4 per cent to 6 per cent by the end of the year, and 3 per cent over the next couple of years.
In short, the impact of Covid-19 may turn out to be an economic paradox: the deepest UK recession since records began, but also as the first to see house prices rise to a record level in the months before recovery really gets going. And whilst this may be strange, it also seems in keeping with these very peculiar times.
Nitesh Patel is a strategic economist at Yorkshire Building Society