Fear and roving in the housing market

The pandemic disrupted most things. The housing market was not immune. Understanding the disruption caused matters hugely – homes are core to our lives.

Housing increasingly determines life chances and wellbeing. It makes up about half of the nation’s net assets and absorbs a growing share of our income. From a construction perspective, housing-related work accounts for around 40% of the industry’s output and provides a hefty chunk of architects’ workloads.

But knowing the housing market was disrupted is one thing; assessing how and what is temporary and what is permanent is another. Bold statements suggest it has been changed forever. It’s hard to argue with that, given that the market is constantly in flux. The challenge is to build an understanding of how the pandemic might reshape the prospects of households, communities, and the livelihoods of those involved in delivering new homes and improving the existing housing stock.

In this quest it is important to recognise that the immediate changes in the housing market witnessed over the past year and a half will have secondary effects. They will trigger further changes down the line. It is important too to recognise the paradoxical nature of some impacts.

Market changes are complex

When the pandemic hit our shores, the expectation was that house prices would fall. House builders’ share prices plunged. A year later house prices were racing upward. London was the exception, but even that has had a patchwork of hot and cold spots, by location and types of homes.

Caution should be taken in interpreting the Office for National Statistics figures in Chart 1 given the oddities in the market and the impact of base effects (where the rise is taken from an unusually high or low point in the previous year). Other house price indexes, for instance, show far lower price growth in Scotland. But it points to a radical shift in the market with growth weighted towards less populated areas.

This has been widely depicted as a ‘race for space’. But that’s just part of the story that describes the early reaction of the housing market to pandemic pressures. Take a longer view and it seems that in many ways, not just in price changes, the jolt of the pandemic accelerated pre-existing trends. So, it is easy to oversimplify or overestimate the race for space narrative. The housing market covers all households. Not all sought refuge in seeking bigger homes with bigger gardens. Some took the opportunity to move deeper into cities.

Chart 2, provided by Zoopla, illustrates, on the single measure of prosperity, how different buyer groups reacted. The well-to-do were already gaining further ground in the housing market through 2019. However, this upward trickle in activity turned into a surge. This may be viewed as a social issue. It is. But it is also important from a built environment perspective as well-to-do people buy different houses in different places compared with those who struggle financially.

Combining the race for space narrative with that of the wealthier increasing their share in the mix of buyers supports the idea of a surge in larger homes bought in less densely populated areas. This was seen during the pandemic in the overall market and reflected in new-build sales and home improvement.

One driving force was working from home (WFH). This is revealed in research undertaken by Zoopla for the Housing Market Intelligence report, produced for the Home Builders Federation (HBF) in partnership with NHBC. Chart 3, based on a survey by Zoopla of a representative sample of 1,000 households in July 2021, shows how WFH appears to be a huge factor in prompting house moves.

More influences than just Covid

This clearly fits with the shift of wealthier types from urban areas because those working from home tend to be better off and more likely to live in cities. But caution is required in interpretation as other factors are in play. For instance, the government’s over-zealous decision to introduce a stamp duty holiday played a part in pouring fuel on a market that was hot when the first lockdown was eased. Inevitably the incentives were skewed to the better off. The extensions to the Help to Buy deadline will also have impacts on the new-build market, turning up the volumes in what was a flagging market at the end of 2019.

Inevitably the impact of Covid-19 on the motivations of home buyers varied by type of household. This too was picked up in the Zoopla survey. Through lockdown different types of households reassessed their needs and came up with different answers. Chart 4 provides a quick illustration of some basic differences. Those without families were more eager for outside space. Those with families were more likely to desire more space in the home, particularly young families who by and large are more likely to own or rent smaller homes than older families.

An immediate effect was that popularity of houses rose while sellers of flats struggled. This shows up not just in prices, but in the production from house builders and developers. NHBC data suggests that pre-pandemic flats were an increasing share in the mix of new homes. This revival was cut short when the pandemic struck. Production focused more heavily than ever on houses. Here again, the pandemic is unlikely to be the only factor at play. The repercussions of Grenfell and the cladding crisis along with concerns over leaseholds has been steadily eroding the attraction to owning a flat.

But even this quick skip through the data suggests that the pandemic and WFH has had a profound immediate impact on the housing market and the types of homes to which people now aspire. Further analysis by Zoopla survey suggests the changes seen over the past months have further to run.

The survey found that for most households the pandemic had little or no impact on their desire to move home over the next two years. But most households don’t move often. About 7% move each year according to the English Housing Survey.

In this light, the finding that 22% of the representative sample surveyed said Covid-19 had made them more eager to move over the next two years, against 6% saying they were less eager, points to a significantly heightened interest in moving home. The increased eagerness to move is found more in cities than in rural communities, where on balance Covid-19 has made the population less eager to move.

The reasons vary, but half were to do with home-related factors rather than work or personal reasons. This suggests many people now want a different place to live rather for reasons such as moving to new jobs or wanting to live closer to family.

What this newly-sought home might be varies significantly between demographic groups. Some younger households, for instance, were keen to move into more urban areas where families might be more inclined to move out. If the mood is sustained, it paints a complex pattern of change and realignment ahead.

Turning to new homes, decision-making by house builders and developers has been made more complex by other impacts of the pandemic – notably the disruption of supply chains, rising input costs and labour shortages. Added to these challenges, there is a slug of regulatory change in the pipeline. These immediate and imminent challenges are compounded by the hot market for new homes and the disruption in production leading to a dearth of stock to sell. The focus of house builders has clearly been on completions rather than starts as they sought to deliver into a hot market in times of uncertainty.

This can be seen in Chart 5. Housing starts data, although a bit unreliable, tend to reflect confidence in the market, while completions tend to reflect the heat of the market. But the disruption will make these hard to interpret. The shifting focus to different locations and different house types means house builders will have to expand their pipeline of new homes. This may boost starts significantly. Meanwhile, house builders may also be tempted to boost starts further in anticipation of the raft of new regulations set to be introduced to maintain a flow of stock built to current standards as they ease themselves into adopting new regulations. 

Certainly, in the near term we should expect an emphasis on starts, if only to rebuild the depleted stock levels. HBF survey data shows that house builders in 2019 had more stock and work in progress than needed to meet demand. Now they have too little. House builders have for some time been replenishing stocks of land; availability has tightened and is increasingly seen as a constraint. This has resulted in rising land prices as investment, particularly in smaller and more flexible sites, increased.

For architects this suggests an intriguing period with market changes, regulatory changes, supply chain disruption both in labour and materials, and customer preferences in flux. That housing work in the near term looks set to be front-end loaded points to more work in volume terms. But the challenge is also to interpret and realise the multiple market changes in housing design.

Change and uncertainty

The word uncertainty has tended to sum up the construction and housing sector since the global financial crisis. The pandemic has taken us beyond that uncertainty. We know change is coming. We just don’t know what it looks like. Some changes provoked by the pandemic will remain. We will have more working from home. Some effects may fade, but scars will remain. Ultimately, there are many reasons to be highly positive about the future of the housing sector. Simultaneously there are plenty of reasons to be very pessimistic.

The disruption of the pandemic has provided an opportunity to make faster progress on the climate change agenda. Furthermore, it is likely to prove a bigger prompt for change than the government’s loosely defined levelling up agenda. Conveniently for the government, the forces unleashed by Covid-19 have the potential to greatly support more equitable distribution of wealth and opportunity between the regions and devolved nations of the UK.

Indeed, while it revealed the deep inequalities in the nation and the fragility in finances of many households, the initial impact was to prompt a distribution of housing wealth from London to the regions. Rising levels of working from home could embed more higher earners within communities where incomes have previously been lower.

However, unless tamed, the forces also have the potential to exacerbate inequalities within the regions and our communities. We are living through a moment offering huge potential but high risk.

For those in the wider construction community, the way policy choices are framed to channel the forces unleashed by Covid-19 will determine how the housing market progresses and indeed how the built environment is shaped across the nation.