House price boom, and rise in inequality, looks set to continue
Tony Syme, expert in macroeconomics at the University of Salford Business School, looks at what is driving a huge increase in house prices since the start of the pandemic.
Some economic think-tanks predicted double-digit reductions in house prices this year as a result of the pandemic. 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.
One factor is historically low interest rates. The pandemic may have crippled economies, but global stock and property markets have surged. Another factor in the property boom is the ‘race for space’. It has been widely reported that larger houses and those with gardens have sold quicker and with higher price rises than flats.
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. The property market has boomed during the pandemic, but so has inequality.
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 19th Century. 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.
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