Yahoo Finance How working from home will depress house prices for good
Working from home will permanently depress house prices by 10pc, a leading economist at the Office for Budget Responsibility (OBR) has said.
David Miles, one of the three members of the OBR’s executive team, said he expected working from home to be a “permanent change” that will dampen house price growth within the next three or four years.
He predicted that people will move farther away from city centres, lowering demand for expensive properties in these areas and causing a “net reduction in the average level of prices across the country”.
Citing his academic research, Mr Miles said he expected the price of homes in rural areas to rise, but said, as they tend to be cheaper on average, any increase in value would not be enough to compensate for the effect of a slump in cities on national prices.
He said the amount people can spend will also be significantly limited by rising interest rates, in contrast to previous years.
During the pandemic, many moving to the countryside upgraded to pricier homes while rates were very low and a stamp duty holiday was in place.
Mr Miles, who is also a professor at Imperial College London, recently said the “age of massive rises of house prices may be nearing an end” because of higher interest rates, slowing population growth and working from home.
Speaking to this newspaper, he said: “There’s much greater ability for people to work quite effectively from home – more than anybody really thought likely before Covid.
“That looks like it’s going to cause a permanent change in the flexibility that people have about where they work and how far they need to live from their place of employment.
“That’s a positive in terms of affordability because it obviously opens up the prospect of people being able to live further away from urban centres where house prices are cheaper, something which might not be feasible if you needed to go into work every day.”
Modelling he has developed as part of his academic research shows that “within three or four years, the level of house prices is 10pc lower than it would have been, and stays at that more affordable level”, he added.
Official forecasts from the OBR do not currently take into account the estimated impact of working from home, which would worsen the outlook for prices.
In its latest assessment in March, the OBR said house prices would fall by 10pc from their peak in the fourth quarter of 2022 before rebounding in the second quarter of 2024.
By the end of 2025 they are forecast to rise by 2.8pc year-on-year, with uplifts of 3.6pc in 2026 and another 3.6pc in 2027.
The OBR has faced criticism about the accuracy of its central forecasts, with Mr Miles previously conceding that they were “almost guaranteed to be wrong”.
Mr Miles said the impact of working from home on house prices would “take some time to play out”.
He said: “If your employer says you can work from home up to two days a week but you bought a house relatively close to the centre of a city, you’re not going to be selling and moving instantly when you find out that’s an option.
“It might take a year, or three or four years, for the majority of people to decide: ‘actually, this is here to stay so let’s go live in that nice, quieter place farther out where it’s cheaper.’”
Many employers continue to allow working from home. A fifth of all jobs advertised in May (19pc) offered “hybrid” working, up 9 percentage points from a year ago, according to jobs website Adzuna. Around 6pc of roles are advertised as fully remote.
Adzuna said the number is likely to be even greater as many employers do not specify whether they offer flexible working arrangements.
In January 2020, before the pandemic, less than 1pc of job adverts were advertised as hybrid working.
Cities are already hit harder by house price falls
Neal Hudson, of analysts BuiltPlace, said people already started moving out of cities during the pandemic in what became known in property circles as the “race for space”, prompted by the ability to work remotely.
This has led to price rises in rural areas that offer longer commutes to London but, arguably, a higher quality of life.
London had one of the slowest rises in house prices during the pandemic and is set to continue to be hit harder than other places now that the house price boom has ended.
While the housing market has not yet dropped as much as many were predicting, cities are already showing signs of bigger price falls than rural areas, according to Hamptons estate agents.
The average house price in a city is £413,720, down 3.6pc since a year ago. By contrast, house prices outside cities are flat compared with a year ago, at £322,010 on average.
Mr Hudson said working from home contributed to increased house prices during the pandemic – but this was in the context of record low interest rates that allowed people to borrow more money and buy larger homes outside cities.
A stamp duty holiday from July 2020 to June 2021 also made it cheaper to buy expensive homes.
But that tax break has since ended and interest rates have shot up, pushing up mortgage repayments dramatically.
Mr Miles said buyers’ and homeowners’ ability to pay these more expensive mortgages is another factor that is likely to depress house price growth in the coming years.
Housing affordability has fallen to the lowest level in 150 years, according to a report from the asset manager Schroders. House prices now stand at more than nine times the average salary, a ratio not seen since 1876, it said.
Mr Miles said incomes have not kept pace with the jump in what it costs to buy a home.
With interest rates at much higher levels than during the pandemic, when mortgage rates hit historic lows, those who move out of big cities are likely to opt for cheaper homes now rather than more expensive ones.
He said he also expects borrowing costs to remain elevated for years to come as the era of record-low interest rates comes to an end.
‘Working from home has been transformational for me’
Oliver Custance-Baker, of Strutt & Parker estate agents, said he continues to see interest from buyers looking to switch from cities to the countryside.
“We’ve seen more people looking at buying somewhere with a view to gradually moving there full-time as well, but people are also keen to put roots down and buy into the village or community lifestyle,” he said.
Many who have deserted cities said they have no intention of coming back.
Among them is Alice Weightman and her husband Charles Yardley, who sold their house in Richmond and moved to Alnwick in Northumberland two years ago. They bought their eight-bedroom Grade II listed property, set in 18 acres, for £1.9m.
Ms Weightman, 48, has two companies based in London, which are recruitment and tech-related, and typically travels to London on Tuesdays. She stays in a hotel for two or three days a week.
She has created a flexible working policy at her companies so her employees can do the same if they wish, and said she uses the train time of 3.5 hours to get work done without distractions.
When the pandemic forced everyone to work entirely from home, Ms Weightman stayed on her family’s farm and realised how much she loved living in the countryside.
“It’s been transformational,” she said. “I’m probably more relaxed than I’ve ever been. I can suddenly, at five or six o’clock, go off into the garden or go for a walk, or cycle – I’ve now got an electric mountain bike. A weekend here is like four or five days away. It’s the beautiful countryside, you’ve got a very friendly community around you and you get to know all your neighbours.”
She said she encourages her employees to go into the office half of the time to talk to people and have meetings, and then do their administrative work at home.
“It’s better I think for your mental health and your physical health every day,” she added.
‘It was a no-brainer’
Mark Smith, 25, left the London borough of Bromley two years ago, where he and his partner were renting, so they could buy a house in Maidstone, Kent.
Mr Smith, who runs a social media and content creation company, works fully remotely, while his partner, an interior designer, is now able to work from home part of the week.
“I worked remotely so it didn’t really matter where I lived and the house prices were so much cheaper,” he said. “It was a no-brainer.”
They paid around £250,000 for a two-bedroom terrace – substantially less than what it would have cost them to buy in Bromley. He said they had been looking in London but could only afford a one-bedroom flat.
“The quality of life is a lot better,” he said. “Rather than spending time commuting, we can spend that time actually enjoying breakfast and going out in the morning for a walk. Luckily where we live now is a 10-minute walk from farmland. So we can actually enjoy a bit more of our free time than we would have been able if we were stuck commuting.”
He said his staff are dotted around different parts of the country because they have no offices – including one who lives in rural Norfolk.
Mr Smith plans to keep working remotely for the foreseeable future.
‘Employers begin calling staff back to the office’
Predictions about the impact of working from home on house prices are based on the assumption that it will remain a permanent feature of the labour market, but some employers are demanding a return to the office.
The investment bank Investec wants its staff to return to the office for four days a week, up from three, The Telegraph revealed earlier this week.
Lloyds Banking Group, JP Morgan and BlackRock have all told their employees that they must return to the workplace more frequently.
But Paul Johnson, director of the Institute for Fiscal Studies think tank, said most companies expected to retain some form of flexible working.
Fewer than one in ten companies have told staff they must come back to the office full-time, according to a survey of 120 companies by estate agent CBRE.
The majority of businesses said they expect to push for a return to more regular office life in the coming months, but just 6pc are planning to enforce full-time commuting.
Mr Johnson said the number of hybrid workers is now five or six times higher than before the pandemic.
“It’s very hard to give any reason why that won’t continue,” he said. “Workers like it and employers seem willing to accommodate it, particularly in a tight labour market.”
He said unemployment is expected to increase but not enough to give employers the bargaining power to demand a full return to the office.
Although he said fully remote working is “bad for productivity for a lot of people”, there’s “not much evidence” that this is the case for hybrid working – for instance, if a worker is only in the office three days a week.
He said he expects three or four days in the office to become the norm, rather than one or two days a week. This could limit the extent to which people are willing to move far away from city centres.
Mr Johnson said many employers want to offer hybrid working because it saves them money on office space as well as pay. The best estimates suggest people value being able to work two days a week from home at 8pc of their pay.
“That’s quite a lot,” he said. “If you think you can pay people 8pc less if you’re giving them a couple of days at home that’s certainly going to weigh in your decision making.”
With high numbers of jobs to choose from, workers have a lot of leverage to demand flexible working. The number of vacancies in February to April 2023 was 1.08 million – 282,000 more than pre-pandemic levels, according to the Office for National Statistics.
The Government wants to plug gaps in the labour market by encouraging people to come out of retirement and increasing support for childcare costs – but this is likely to be dependent on hybrid working remaining in place.
Jack Kennedy, an economist at jobs platform Indeed, said surveys and real-world data shows one of the “big factors” that would be important to a lot of older workers to incentivise them to come back is having the flexibility to work remotely.
“If they’re not getting that sort of flexibility offered, then they’re going to be a lot more reluctant to come back, particularly the more financially secure people that have potentially got quite substantial experience and skills still to offer, but don’t really want to be coming into the office five days a week anymore,” he said.
Although net migration has reached record levels, Mr Johnson said a very small proportion of people are coming into the UK with worker visas, meaning their impact on the labour market will be marginal.
“Working from home is here to stay,” he said.
