News in Charts: Valuing land before and after Covid

Among many other things, the pandemic has taught us that there is a category of work, including more or less all office-based work, that can be carried out remotely. Changes in the way we work are likely to affect the absolute level of house prices across the UK, with the demand for residential space rising and that for commercial space falling. But the impact on prices at the regional and sub-regional level may be much greater still. Indeed, alongside the cuts in stamp duty, it is likely that a significant driver of the pickup in house prices at the national level (chart below) has been the desire for more living space.

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Fathom has recently developed an automated valuation model (AVM), which allows us to estimate the current value of any residential property in England and Wales for which we have past sales data. The AVM provides us with a set of time series describing the average value of residential properties across 9000 or so postcode sectors in England and Wales. We have recently used these time series, together with information on the characteristics of each postcode sector, to look into what drove land values before the pandemic, and to make suggestions about how these drivers might change after the pandemic.

The distribution of average house prices across England and Wales is very wide, with London prices double the UK average and almost four times those in the North East (chart below). We find that we can explain more than 50% of the variation in average house prices across postcode sectors in 2019 with just one variable — the straight-line distance from the centre of each postcode sector to the centre of London (prices decline as we move away from the capital).

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Moreover, we find that we can explain a greater proportion of the variation in house prices around the country if, in addition to the straight-line distance from London, we include other characteristics such as land type (urban versus rural), proximity to public transport, and the area’s inclusion or otherwise in one of twelve national parks of England and Wales.

We find that in 2019 a property in a rural hamlet would be worth around two and a half times as much as a property that in all other respects was in an identical location, except for the fact that it was in a built-up urban area (chart below).^[1] This premium attached to properties in small towns and villages that are distant from other built-up areas has risen steadily over the past quarter of a century.

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In modelling the variation in land values, we also consider proximity to two types of public transport: railway stations and London Underground stations. Our analysis suggests that the value of being near a railway station depends crucially on proximity to London. On the eve of the pandemic, being within half a mile of a railway station added around 28% to the value of a property within commuting distance of London, but nothing to the value of a property further from London. Being within half a mile of a Tube station added 32% to the value of a property.

Since the mid-1990s, the value of being near a form of public transport that will get you to central London in a reasonable period of time has tended to rise. This is mirrored in an increase in rail travel into London and an increase in Tube usage and an increase in the share of UK GVA attributable to firms based in London. While correlation does not imply causality, our results are suggestive of the fact that the growing importance of London to the economy over the past quarter century has accounted for an increase in travel into and around London, and the increase in the value of property near public transport that will get you into central London.

Post-pandemic, we may see a decline in the share of GDP produced by firms within central London — Google mobility data are suggestive of such an effect in the early stages of recovery — or we may not. What seems more certain is that we will see a sustained reduction in the number of people who take the train and/or Tube, into central London to work each day; a reflection of the fact that many office workers in London are expected to be working around 2-3 days a week from home.

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All in all, our analysis of the characteristics that have determined residential land values over time suggests there has been a trend toward valuing rural locations over urban locations. But proximity to London has been important too, accounting by itself for 50% of the variation in land values across England and Wales. A sustained increase in home working, which seems an almost inevitable consequence of the pandemic, is likely to strengthen the outperformance of rural areas, and lessen the dependency of land values on proximity to London. As a result, the recent underperformance of London house prices could be set to continue (chart above).

[1]        That means it would be the same distance from London, just as close to public transport, both would be either inside or outside a national park, and so on.

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