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How come house prices are going up as the economy goes down?

Words:
Brian Green

There are always winners and losers in a recession. This time, the winners are wealthier buyers and – with luck – architects benefiting from a resurgent interest in home improvements

UK citizens are being told to brace themselves for the worst economic shock in almost a decade. Yet house prices have reached new heights and activity in terms of home sales is pretty much as high as it has been since the recession a decade ago.

Can both really be true? If so, how? And what does this say about prospects for the housing related construction work that is a core sector for so many UK architects?

Chart 1.
Chart 1.

Chart 1, an increasingly familiar graph, shows just how hard the coronavirus lockdown hit the economy. While it is shocking, it is also slightly bamboozling.

Up to the start of the second quarter of 2020, each minor ripple on the line had generated reams of detailed analysis, written with an air of confidence. Then a scale-shattering drop in economic activity comes along and, while it has a massive impact, oddly it tells us little about how the coronavirus pandemic will affect the structure of people’s lives within work and the wider community.

The pace of this economic collapse dwarfs anything seen during the global financial crisis, indeed any time since the second world war. With no recent precedents it is difficult to compute the likely outcomes in detail with any reliability. All we really know is that it hit hard, and we can vaguely guess where it has hit hardest and least. Any assessment is made all the trickier with murky Brexit clouds still hanging over the UK economy.

Pretty much all we can safely say is that the economy is in troubled times. When it comes to the housing market the data is more informative.

Chart 2.
Chart 2.

The data for Chart 2 was provided by Neal Hudson of consultancy group Built Place. It shows a spike in sales agreed, as measured by Rightmove. It also shows a sharp spike forming in mortgage approvals, while housing transactions are bouncing back strongly.

Zoopla data shows a growing eagerness in the market with the time to sell a house shrinking markedly since the lockdown was lifted. And Chart 3, based on Zoopla data, shows how house prices are rising, even in London where prices had softened considerably last year. In the year to July annual UK house price inflation was at 2.5%, up from 2% at the turn of the year. Other indexes show similar price growth, with the Halifax suggesting annual inflation topped 5% in August.

But doesn’t history tell us that economic downturns hit house prices? A quick look at a range of house price forecasts suggests this was certainly the view during lockdown. The mid view then suggested prices falls this year of between 3% and 4%.

So what is different now, prompting so many people suddenly to buy homes at higher prices?

Economic shocks can create paradoxes. Astute analysts know this. Many sensibly caveated their forecasts suggesting it was hard to know the outcome. Shocks often result in big gains for some and big losses for others whether the economy overall goes up or down. But even to seasoned observers this recent price surge comes as a surprise.

As more data comes in, a mix of explanations are emerging that, taken as a whole, help to make sense of what is going on. Hudson notes in his August market commentary that, while the bounce seemed to surprise many analysts, it is understandable if you appreciate the inequalities in the housing market. This is a point Richard Donnell, director of research & insight at Zoopla, also alluded to. Averages disguise a multitude of differing experiences within markets.

When gauging changes in house prices it is worth noting that they are sticky, tending to go up more easily than they fall. Transactions, which can fall sharply in a turbulent market, often take more strain than prices in a housing market downturn. Simply put, sellers pull out if the expected sale prices are not met. This reduces supply and supports prices.

Perhaps more importantly, at the current rates of sales, little more than 1% of private homes are sold over a three-month period. So, swings in buyer behaviour can have quite a dramatic effect on the volume and mix of the buyers active in the market. And you must be in the market to determine prices.

And it does seem that the mix of buyers has shifted quite markedly. The data show more wealthier buyers in the market. This changed mix can skew a house price index however well-balanced the mix-adjustment that is applied. This can lead to bias in the average pricing. Donnell noted, in a tweet, that average prices would be about 8% higher on the year in August if they were delivered unadjusted.

Chart 3.
Chart 3.

The wealthier mix of buyers seen recently is likely to be one factor pushing average prices up. Added to this is a backlog of sales, stalled by the lockdown, creating a wave of demand, while the stock of homes being put on the market was held back during lockdown.

Then there was a rather naively timed stamp duty holiday introduced in early July, designed to accelerate market activity. Given that most stamp duty is paid by the wealthier buyers, the holiday benefits them most, further skewing sales towards the better off.

But, interestingly, Donnell has observed in his analysis of the Zoopla data that there has also been a distinct shift in the locations and types of home being bought. This may reflect the reaction of many households to the pandemic and the lockdown.

Chart 4.
Chart 4.

Focusing on London, where relatively wealthy people can live in relatively small homes, Chart 4 illustrates the change post lockdown in the demand (active lead) for various home types. The shift towards bigger homes and away from flats is very evident. The sweet spot for sellers currently is three-bedroom houses, where demand has surged and is now well above what is on the market. Donnell says the data also suggests that the lack of supply to meet the demand in London is encouraging households to look to more suburban locations.

Chart 5.
Chart 5.

Similar patterns showing a growing preference for bigger homes can be seen in the national data. Chart 5 shows the change in the time to sell homes. The time to sell measures from the date first marketed for sale to going under offer or ‘sold subject to contract’. It takes a further three months for a sale to complete. This measure can indicate changing desires among those buying.

Since the lifting of lockdown sales have taken about a third less time. But it is striking just how much further the time to sell larger houses has dropped compared with small flats. Four- and five-bed homes last year took longer to sell than one-bed flats. Now they sell faster. Three-bed homes, always reasonably popular, are now the way-out winners for a fast sale.

It is early days, but the data to date does support the view that the pandemic has influenced attitudes to the home, certainly among some households. Working from home during the lockdown and the likelihood of more flexibility to work from home in the future seems to have prompted people to look for larger homes. This is particularly true for those financially able to make the move now and they are likely to be among the better off professional classes.

The pandemic has, as many experts increasingly remark, accelerated and reinforced underlying changes already under way in terms of adjustment to a digital economy that allows more remote working. It has also encouraged people to revalue the importance of ‘home’. This suggests that the trends seen post-lockdown in the housing market will continue, if perhaps less obviously.

But what does this mean for those designing and building homes?

In the very short-term the surge in activity and the shift to larger homes will have been refreshing for housebuilders, particularly those whose pipeline was ‘overweight’ in the share of larger homes. But looking to the year ahead housebuilders will be exceptionally confused on what tack to take. A surge in demand now is handy, but how sustainable will this be? Meanwhile, developers of city centre flats will be very concerned.

Looking to the year ahead, the forces lined up against builders are many and serious. There is a potential for a tidal wave of unemployment as the full force of restrictions passes through the economy. The economic fortitude of the UK is likely to take a further bashing when Brexit is fully realised. Added to this, the end of the Help to Buy scheme looms large. This has propped up sales. The extension will help, but its support will be weaker. Restrictions on mortgages will also squeeze the funds available to buyers, as lenders become more cautious. All this points to a severe slowdown in new build homes.

Trying to assess the effect of this complex pattern of forces acting on the market in terms of both volumes and the mix of home types is tough. As things stand, it is highly likely that housebuilders, particularly the larger publicly listed firms, will be cautious. This may be reinforced by them having to absorb the complexity of major changes to the planning system. And the Future Homes consultation may add further cause for caution.

Certainly, the Construction Products Association forecast suggests a deep fall in workload in both private and public housebuilding is already baked in for this year. While there will be a strong bounce-back in 2021, CPA expects activity to be well down on 2019 levels.

By way of a counterbalance, there has been a resurgence in interest in home improvement. The lockdown and home working have, for many, reinforced the case for an extension or loft conversion. However, while desire may be spiking, the effective demand will rest on access to funds. Here a weakening economy will be a restraint, although government loans or grants could help.

Across the market as a whole, the picture looks bleak. However, architects tend to win more work from the more affluent and those more inclined to bespoke projects than from the mass market. Here there may be rays of sunshine poking through the dark clouds.

The real upside for architects appears to lie in the longer term, with growing desire within the population for a better quality of home. How and when this will be realised is another story.

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