Revenge of the city

Revenge of the city

A return to the 'old normal' for London housing?

Last April we analysed London property prices and found that the first national lockdown had a marked effect on house prices.

Prices in central London dipped more severely during the first lockdown than in the surrounding counties, indicating that demand was shifting away from central London and toward the suburbs. The data implied that this was not a complete ‘tree change’, but rather a trend to move to greener areas while still being close to the city.

There have been plenty of further developments since our first article, including two more national lockdowns and an ongoing cost of living crisis. This raises the question: have behavioural changes observed during the first lockdown persisted or evolved further, or is the property market back to its old normal?

How have property prices changed since 2020?

Figure 1 presents median monthly property prices for London and the surrounding counties up to April 2022.

Figure 1 Median monthly property prices

Source: Frontier Economics

We can see the effect of the first lockdown that we explored in our last article. Prices experienced a short-term dip but quickly recovered. In surrounding counties, prices then overshot previous levels, revealing an apparent preference for these areas – a trend that seems to have flattened out since. However, the two subsequent lockdowns at the end of 2020 and the beginning of 2021 had little discernible effect on headline house prices. Instead, price fluctuations have become more pronounced in the months since the last lockdown.

It seems likely that these spikes in median prices are at least in part due to the government’s stamp duty holiday.

What is stamp duty?

In the UK, property buyers incur a stamp duty tax when they pay over a certain threshold, which is £125,000 for residential properties.

The government introduced a partial stamp duty holiday in July 2020, increasing the threshold price from £125,000 to £500,000. The relief was part of a policy package aimed at mitigating the effects of COVID-19 on the economy. It was meant to keep construction work at a sustainable level and nudge people towards buying new homes. The holiday was initially due to end by March 2021 but was extended to the end of June. Another stamp duty holiday with a threshold of £250,000 was then introduced from the end of June to the end of September.

The chart below depicts the same median monthly prices as in the first graph, but instead of lockdowns we now mark where the stamp duty holiday came into effect, as well as the announced end (dotted lines) and actual end (dashed line).

Figure 2 Impact of the Stamp duty holiday

Source: Frontier Economics

Note: Dashed lines represent actual beginning and end of stamp duty holiday, dotted lines represent announced but cancelled ends

Figure 2 shows that the spikes in prices aligned with developments in the stamp duty holiday. We see pronounced price increases shortly before the anticipated end dates followed by pronounced decreases on the end dates themselves.

Overall, what we observe is that the initial effects of COVID-19 on property prices through the first lockdown were subsequently dwarfed by the impact of the government’s policy response.

What drove these changes in prices?

To answer this question, we need to dig deeper and examine how demand changed for properties in different price bands.

Figure 3 year-over-year change in number of PROPERTIES sold by price band

Source: Frontier Economics

Note: Dashed lines represent actual beginning and end of stamp duty holiday, dotted lines represent announced but cancelled ends

Figure 3 above shows that properties in all price bands saw sales jump during the reduction in stamp duty before going into decline when the holiday came to an end. This suggests that at least some of the fluctuation in median property prices was due to market-wide changes in the balance of demand and supply. However, the chart also indicates that more expensive housing experienced the strongest response to the tax measures, with an especially large surge in sales just before the July 2021 cut-off. This suggests that even though the stamp duty holiday offered a relatively larger discount to lower-value properties, the wealthiest buyers may have been better able to take advantage of the tax break due to readier access to cash and credit. While this higher-end demand may have fulfilled the initial policy goal of temporarily propping up investment in the property market, it is not the most equitable outcome. It may also have created a sales glut which is now contributing to unusually low sales in 2022.

Where are we now?

Stepping back, we‘ve taken a look at the types of properties sold during the previous three years, in order to assess what lies behind the trends outlined above.

Figure 4 Share of total sales by property type 

Source: : Frontier Economics

As shown in Figure 4 above, the share of flats within the overall number of properties sold on the London market has been decreasing steadily and reached a low in 2021. The proportion seems to have picked up slightly in 2022, but with only three months of data for the year it is too soon to tell. The steady decline hitherto might speak to a more general trend away from flats and towards properties with gardens, located further away from the bustling city centre. To test this assumption we mapped post-lockdown price changes. Figure 5 below compares pre-pandemic prices in the first three months of 2019 with the latest post-pandemic prices for the same months in 2022.

Figure 5 Change in median price from pre- to post-covid lockdown

Source: Frontier Economics

Note: Periods considered are Jan-Mar 2022 versus Jan-Mar 2020

Overall, London remains a desirable location, but demand for property in the very centre of the capital has weakened in the post-Covid ‘new normal’. This pattern in demand persists when we examine the relative month-on-month evolution in London district prices. The preference for typically leafier and less dense areas, such as West London, that developed during the first lockdown continues up to today, possibly pointing to a more enduring change in Londoners’ tastes. Sure enough, this notion is backed up by an overall trend toward slightly lower prices than in the ‘old normal’ for properties closer to the city centre.

Though it remains too soon to declare the emergence of a truly post-COVID London property market, trends which we observed last year are persisting, implying a genuine shift away from the old normal and toward greener pastures.