House price boom – and rising inequality looks set to continue
Tony Syme, expert in macro economics at the University of Salford Business School, looks at what is driving a huge increase in house prices since the start of the pandemic.
In July 2020, the Office for Budget Responsibility (OBR) predicted that house prices would fall 0.7% in 2020 and 3.8% in 2021.
Some economic think-tanks predicted double-digit reductions in house prices this year. The reality has been very different. The latest Nationwide house price index reports a 10.9% increase in house prices over the past year, the highest level in nearly seven years.
And it is not just a UK-wide phenomenon, the 2021 housing market boom is a global phenomenon.
One global factor is historically low interest rates. These have seen investors turn their attention towards the returns on residential property and forced the IMF in April to warn that rising long-term interest rates in the US could trigger overpriced assets, such as property, to ‘unwind in a disorderly manner’. The pandemic may have crippled economies, but global stock and property markets have surged.
Another global factor in the property boom is the ‘race for space’. It has been widely reported in the UK that larger houses and those with gardens have sold quicker and with higher price rises than flats, but this feature has been reported in all countries with property booms. The ‘work at home if you can’ message has been met with a desire to address long-standing work-life balance issues and to create a working office space within the home.
When Apple recently wrote to all staff outlining that they should be the office at three days a week by September, it was met with strong resistance. Twitter and Facebook, by contrast, have argued that remote working ‘is the future’.
The up-scaling of existing home and moving to larger homes has its roots in the pandemic, alongside the low interest rates. For households that have not been able to take a foreign vacation, the accumulation of savings has opened up new possibilities in terms of affordability for new, larger houses, as well as home improvements that increase the value of the house.
But while this is a tale of unparalleled wealth growth for many, it is not the case for everyone. One-third of properties in UK are rented and these tenants have not seen an increase in their wealth. And the narrative above is focussed on those white collar workers who have maintained their employment throughout the pandemic. By May 2021, 11.5 million employee jobs had been furloughed through the Government’s job retention scheme.
Most affected were those in the accommodation and food services sector and the arts, entertainment and recreation sector. In both sectors, over 40% of jobs had been furloughed. Those aged 24 and under have had the highest proportion of furloughed jobs. The property market has boomed during the pandemic, but so has inequality.
And the prospects for the future? Will the property market face a ‘correction’ once the stamp duty holiday ends in September? The rising inequality within the housing market and the semi-permanence of hybrid working patterns suggests otherwise. The CIPD reported in April that two-thirds of employers planned to introduce or expand the use of hybrid working. The need for a suitable working space in the home will maintain the ‘race for space’.
Schroders recently showed that the UK average house price: average earnings ratio hasn’t been this high since the 1900s. Affordability is clearly a major issue for new entrants to the housing markets, but for those already in that position, the outlook remains positive as house prices will continue to grow for some time yet.