The relentless rise of house prices makes this an unusual recession

If you needed further evidence that we’re living in extremely strange times, you only have to look at house prices. For the past 10 months, the UK housing market has defied all economic logic, with prices rising to record levels and home sales booming, despite the largest contraction in economic activity Britain has seen in more than 300 years.

In every previous UK recession, house prices have slowed or fallen. But the past year has been different. Before the first lockdown in March 2020, demand among buyers had been strong but the lockdown effect of confining people to their homes for all but a few hours a day – and severely restricting what they could do when they were outside – gave people the time and space to re-evaluate their housing needs.

Before the pandemic, homes were, in many cases, functional places to live, a base to enable a busy family life to happen. But now they also need to be a place to work, to teach children, to entertain, to exercise and to enjoy leisure time. Space and gardens have become hugely important to buyers, with the price of detached dwellings rising a third faster than the price of flats.

Many have been helped in their goal for a larger property by a multitude of factors: the stamp duty holiday introduced last July, the extraordinary Government support for jobs and income, and of course, low borrowing costs for those with larger deposits.

Another important factor is the large amounts of savings many households have accumulated due to Covid-19 restrictions limited spending travel – either leisure or work – and social consumption.

We estimate that around £150bn in excess savings – that is, savings above normal levels – has built up in people’s savings and current accounts since the first lockdown.

Due to the nature of the Covid-19 recession, the housing market has also benefitted from the fact that home purchasers are typically from higher income groups. While the average full-time salary in the UK increased from £21,000 in the late 1990s to £38,600 in 2020, the average income of households purchasing a home with a mortgage has more than doubled from £30,000 to £64,770.

The shutdown of businesses that require face-to-face services, like hospitality, meant that job losses and reduction in incomes were concentrated in lower paid occupations. Meanwhile, employment in professional and office-based occupations, in which homeowners are more likely to be employed, has risen.

Household incomes and interest rates are key drivers of house prices, but other policy action is also important in understanding near-term market dynamics.

The combination of pent-up demand from the first lockdown and buyers wanting take…

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