On a sunny afternoon in Kingsmere, a new suburb of Bicester, a city 50 miles north of London, the streets are full of people walking and children playing. 1,600 houses have been built on the site in ten years, and another 900 will follow shortly. At the Bovis Homes sales office, Flip Baglee says she “never knew it was so full”. The atmosphere is similarly lively in Rhinebeck, a village 80 miles north of New York City. Many of the properties advertised in the Gary DiMauro Real Estate window – from villas to cottages – are already taken.
Kingsmere and Rhinebeck aren’t the only places to warm up. American house prices rose 11% in the year through January, the fastest pace in 15 years. The ones in the UK last year by 8% and in Germany by 9%. The pattern can be seen across much of the rich world (see Figure 1). In the 25 countries tracked by The economistReal property prices have risen by an average of 5% over the past 12 months. They only fell in Japan.
In many countries, the increases have been fast enough to have attracted the attention of politicians and central bankers. In a break with the pattern of the last decade, it is prices in less populated but still interchangeable locations, rather than city centers, that are rising the most. Covid-19 appears to have started a search for space that could outlast the pandemic.
At first glance, the resilience of real estate prices may seem confusing given the economic turmoil caused by covid-19: Real estate prices tend to move in parallel with the economy. But vacation programs and fiscal incentives have limited distressed sales this time around. Interest rates are extremely low: America’s 30-year mortgages are 1.5 percentage points below 2010 levels. Lockdowns and the reduced ability to spend mean those who have kept their jobs are stashing cash to have. Lucian Cook of Savills, a UK real estate consultancy, notes that home values ”are determined by the owners rather than the non-owners”. In America, 14% of all mortgage applications in February were for second homes, twice as much as in April last year.
The suburban mixing
As Covid-19 spread and many countries closed, people’s homes also became their offices, schools, gyms, and bakeries. Many therefore spent more on their real estate. Sales at Home Depot, America’s largest hardware store, grew 20% last year. In the UK, permits for home improvement such as expansions increased by a third in 2020 from the 2016-19 average, estimates Barbour ABI, a research firm.
Other people were looking for new places to live. Home sales in America have taken an average of 47 days since May, compared to 59 days last year. In the UK, a temporary vacation on stamp duty (a property transaction tax) caused sales volume to soar to a 14-year high in the final quarter of 2020.
For those who want more space, the best solution was to get out of the city center. Prices per square foot in London are 40% higher than in the surrounding counties. House prices in less densely populated but still interchangeable areas of the UK have risen faster than in more populous areas over the past year. A similar pattern can also be seen in America (see Figure 2).
This is a trend of the last decade, as megacities like London and New York rose above quieter locations – a reversal that Zillow, an American real estate company, calls a “big move.” Real estate prices outside the seven largest cities in Germany rose by 11% last year compared to 6% in the cities. Prices on Sydney’s northern beaches, a commute from the city, are up 10%.
In contrast, property prices in central London and Sydney rose only 4% and 3% respectively over the past year. those in Manhattan fell 4%. The rental markets are cooling off. Sydney apartment rents have fallen 5% over the past year. Those in Melbourne who saw a 111-day lockdown last year fell 8%. Rental data from Zillow suggests the Big Apple is down 9% and Manhattan is down 15%.
The pandemic has disrupted some of the usual urban flows. In the years before Covid-19, London lost residents to the rest of the UK. But the outflows were balanced by people who came from abroad. The pandemic (and possibly Brexit) is likely to have reduced the inflow. One estimate is that the resident population in London could have decreased by 8% in 2020. Australia’s borders have been closed to non-residents since March 2020. Youngest graduates who have the prospect of working from a common home may still live with their parents. Urban outflows have also increased. A study by the Federal Reserve Bank of Cleveland found that urban migration in America doubled to 56,000 people per month as of March 2020, compared to the 2017-19 average.
Some of the flows to the cities will accelerate as the pandemic ends. Students and international migrants will be returning in droves. Some investors therefore rely heavily on large cities. A new development in Manhattan selling large apartments for $ 12 million offers the “first answer to life after a pandemic”. AXA Investment Managers, a company that owns properties in 15 countries, has acquired 1,233 apartments in the heart of London, the UK’s largest residential area.
However, the attraction of less dense places is likely to continue. Government advice to work from home where available could be gone by the summer, but remote work can stay here. According to a survey by Manpower, a recruitment company, of 20,000 employers around the world, two-fifths of bosses plan to allow their employees to work from home at least part of the time. People might be willing to take longer to commute to get more housing or lower housing costs if they commute less frequently. Suburban property prices would then move in the direction of those in the city.
The fate of overall house price growth may lie with policy makers. Emergency aid for home buyers and homeowners will be withdrawn when the pandemic comes to an end: In the UK, tax breaks are set to end later in the year. Other countries could try to relieve the real estate markets. The New Zealand government, whose prices are rising 22% annually, has taken steps to curb speculation. The Governor of the Bank of Canada has been concerned about “excessive exuberance” and plans to keep a close watch on the real estate market. Fear of jeopardizing economic recovery could lead policymakers to be cautious for the time being. That would give the race for space more space to run.