Ending the support measures that have helped the UK housing market rise to record levels during the Covid-induced recession could exacerbate a predicted fall in house prices, according to a new report from the London School of Economics and Political Science.
House prices are expected to fall once support measures, such as the stamp duty holiday, come to an end and the full economic impact of the pandemic starts to be felt.
Combined with Brexit, which is expected to affect London more than other regions, this drop could be larger in the capital and the South East than elsewhere. In the longer term, however, the wider London region’s economy is likely to rebound and given the shortage in housing supply, prices will start to rise again strongly.
In their report The Pandemic and the Housing Market: A British Story, economists Paul Cheshire, Christian Hilber and Olivier Schöni find that measures taken during the pandemic to boost the housing market have helped to drive a rise in house prices, particularly for detached houses with gardens.
But they predict that an economic downturn will follow at some point and ending such temporary support measures carries the risk of triggering a housing market downturn, which will reinforce the economic downturn in a vicious downward spiral.
The report also finds that:
- The biggest price rises have been for those few detached houses close to the centre of London
- House prices increased significantly for detached and semi-detached houses 20-40 km (12-25 miles) from the centre of London.
- The price of flats fell everywhere.
- Renters living in central areas of cities were hit hardest by the pandemic, so rents fell most strongly there; but in the outer areas, they grew substantially.
Professor Paul Cheshire, report co-author, said: “The effects of the Covid-19 crisis are happening as the UK absorbs the economic impact of Brexit. We expect Brexit to lead to slower economic growth and lower incomes than would otherwise have been the case – and for some time, that is likely to affect London and its housing market relatively more than other regions.
"As the stamp duty holiday disproportionately boosted more expensive houses and housing markets, we expect the historically unusual situation of a housing market downturn more substantial in London and the South East than in most other parts of the UK – not a levelling up so much as a dressing down.”
Professor Christian Hilber, report co-author, added: “Cities, which were invented perhaps 12,500 years ago, have ‘survived’ countless natural catastrophes, epidemics or pandemics. While in the long term, say five to ten years, some adaptations such as the use of Zoom or more working from home may stay, cities will recover from the Covid-19 pandemic – people will still want to live in cities.”
“In terms of the housing market, this implies a rising cost of space especially if the British planning system remains as restrictive as it is now. Without radical reform, space in housing and gardens will increasingly become the privilege of the rich – and London will remain unaffordable.”
Dr Olivier Schöni, co-author, commented: “There is a danger of generalising from the extraordinary circumstance of the pandemic and its immediate aftermath to draw conclusions for the future. Some of the innovations in ways of living and working triggered by our adaptation to the Covid-19 pandemic will stick and in the longer term, the economy will recover. An increase in working from home will reinforce the demand for more space in houses and for gardens, but if supply remains as unresponsive as it has been for decades, all that will happen is prices will rise and housing will be more unaffordable than ever.”
The full report is available here: The Pandemic and the Housing Market: A British Story