The Biggest Break-Up of the Century - House Prices and Economic Growth
Emily Dow
House prices and economic growth—two of the highest correlated economic indicators—have diverged since the pandemic’s start. Throughout times of economic turmoil, indicators follow similar patterns; however, economists have found it increasingly difficult to publish the trajectory of the house price-GDP relationship since the outset of the pandemic. After the 2008 economic crisis, GDP and house prices were both negative, and thereafter followed peaks and troughs in line with market fluctuations.
The close relationship between these two measures is due to the decrease of wealth within an economy during times of financial downturn. There is an initial trigger, in this case the pandemic, thus the economy experiences a cycle of depressed demand for items like houses and cars. This contributes to increased unemployment which reduces people’s ability to spend and subsequently results in plummeting house prices.
Recessions entertain thoughts of uncertainty regarding the future. Businesses and individuals are less likely to commit to long-term investments because of the looming possibility of further economic misfortune—a risk which could put high-value investments at risk. The interconnected nature of these factors has infused confidence in the robust relationship between house prices and GDP, having had no reason to ever doubt it—that was until the pandemic. The British government has interfered more than ever. In doing so, it prevented the predicted perpetuity of a depressed housing market despite an economic slowdown.
Throughout the pandemic, the British government has endeavoured to protect incomes with the furlough scheme which cost over £60bn as of April 2021. Despite the large sum, the business loan and furlough projects executed have succeeded in creating a stable income and employment environment which mirrors optimistic 2019 figures. Support schemes have largely shielded low-income jobs while high-paid workers have remained employed. Such legislation has allowed savings levels in the United Kingdom to surpass predicted levels due to job preservation combined with travel and hospitality restrictions, therefore leaving little spending options with individuals’ maintained disposable income. The pandemic has also propelled working from home, something which many now advocate to become a permanent fixture of job contracts. Observed demand and prices of larger properties have increased as families desire more space to cater for their change in lifestyle. Meanwhile, prices for flats and maisonettes have plateaued and even decreased in areas such as London. Paired with the government’s economic expansion efforts, zero stamp duty for the first £500k of a house’s value and only requiring a 5% payment for a mortgage deposit in England encourages wealthy households to make purchases within the housing market.
However, with the average nominal house-price growth reaching its fastest rate since 1990 in almost 40 countries, economists worry that such trends are concealed red flags that indicate a housing bubble caused by house-price led inflation. This poses the risk of house-prices plummeting in the near future, which would undo the British government’s attempts at keeping the economy afloat, and leave the housing market in a similar state to that of credit crunch.
Sources used:
https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=GB
https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/january2021
https://www.statista.com/statistics/1122100/uk-cost-of-furlough-scheme/
https://www.ft.com/content/9fdd1157-55f5-41b7-ae9c-24f68c62a194
https://www.belvoir.co.uk/articles/how-is-coronavirus-affecting-house-prices-in-the-uk/