A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK.
Economic shocks tend to hold back house prices. But one of this pandemic’s peculiarities has been how it has supported housing markets. Despite bringing about the sharpest downturn in almost a century, the pandemic has fuelled a housing boom in the developed world.
Among the OECD group of rich nations, house price growth has accelerated to its fastest pace in 30 years. Real estate consultancy Knight Frank estimates that house prices rose the quickest in New Zealand, by a whopping 22 per cent in the 12 months to March. Latest data from the US and UK also indicate double-digit growth in house prices since last summer.
A lot has to do with the policy response to the pandemic, featuring ultra-low interest rates, income support programmes and tax breaks in some countries, which have boosted house prices. Additional savings by many, whose jobs and incomes were shielded from the worst effects of the crisis, and the growing desire for extra space, as people spend more time at home, also propped up demand for housing. Add to that the rising cost of building materials and a limited stock of existing housing and you have the perfect recipe for house price inflation.
Rising house prices are not necessarily a bad thing, especially as the global recovery picks up pace. They make homeowners better off and more confident about their finances, boosting their spending. However, many worry about the sustainability of these rises and the risk of a significant correction as monetary support is scaled back.
So, are we heading for a subprime-like mortgage crisis?
That seems unlikely, for three reasons. First, unlike subprime, banks haven’t lowered their lending standards during the pandemic. In fact, mortgage demand over the last year has largely been driven by those with stronger financial positions. Also, household balance sheets in the West are in better shape and households are, in general, less indebted now than before the financial crisis.
Second, against a long-run average of incomes, housing looks overvalued in most of the rich world but by a much lesser extent than in the mid-noughties. Finally, having been scarred by the financial crisis, banks and policymakers are far more cautious now and credit growth is significantly slower.
Third, over the last three decades, house prices have generally risen despite frequent assertions of overvaluation. This reflects an incredibly benign regime – from successful inflation targeting, which put rates on a downward trajectory and globalisation, which imported disinflation, weakening upward pressure on rates, to Alan Greenspan’s push to the present ultra-low rate environment and several bouts of quantitative easing – policy has, in the long run, worked to bolster house prices.
In the UK, several structural changes have further supported the housing market. A sharp rise in migration, in the late nineties and especially after EU expansion, faster growth in the number of one and two-person households and rapid urbanisation have all boosted demand for housing, especially in bigger cities.
The effects are there for all to see – rather than the risk of a collapse in house prices, it is the affordability of housing for first-time buyers that has emerged as the biggest concern. In the mid-nineties, the average house sold in the UK was priced between four and five times the average earnings. Now, that ratio is just under nine.
As a result, first-time buyers are waiting longer to accumulate a deposit and increasingly reliant on help from their parents. The average age of a first-time buyer in the UK is 34 years now, up from 28 in 2007. This is also reflected in trends in home ownership and renting – the share of homes inhabited by owner occupiers peaked at around two-thirds in 2001. Since then the share of owner occupiers has declined and that of private renters has almost doubled. Perhaps the most telling effect is the rising numbers of multi-family households in the UK, which are the fastest growing type of household, up 67 per cent since the mid-nineties.
High demand and scarcity of space have also meant that newly built houses are getting smaller, especially in urban areas. Research conducted by Local Authority Building Control found that the average size of a new home built over the last decade in the UK was 68 sq m, almost 20 per cent smaller than the average new home built in the seventies and significantly smaller than new homes built in some European countries.
Brexit and the pandemic are now making significant changes to the UK’s housing market. But their effects are likely to be more pronounced in narrow sub-markets (micro) rather than come in the form of broad-based (or macro) changes. As migration slows and post-pandemic hybrid working arrangements transfer households from cities to suburbs or adjoining towns and villages, demand is likely to be better distributed geographically. This might mean weaker prices in urban conurbations but strong demand in adjoining areas. As people place greater emphasis on space, demand for small flats is likely to weaken while pushing up prices of larger properties with outdoor space.
Policymakers are also focussed on addressing inequality, which has been further widened by the pandemic, and should look to boost the supply of housing, especially for first-time buyers. Historically, major shocks have tended to precede surges in construction activity. Britain saw massive waves of house building after the world wars – by the private sector in the 1920s and 1930s and the public sector after the second world war.
Throughout the second half of the twentieth century, home ownership rose in the UK alongside steady growth in the price of housing. It is developments over the last two decades that have reversed some of the gains in home ownership, in return for much faster rises in house prices. The once-in-a-generation shock of the pandemic and the policy response to it could set home ownership and house prices moving in the same direction again.
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