Economic developments have been driven by wholly exogenous health developments and governments have provided massive fiscal support to incomes, employment, the corporate sector and in some cases like the UK, to housing markets. It remains striking however, that following some of the sharpest economic contractions in modern history and amid great uncertainty and indeed, initially fear, about the future, housing markets have been strong. In the UK, over the 12 months to February, house prices have risen by 9.1%, the highest growth rate since October 2014. This compares to an average annual growth rate of under 4% in the 10 years prior to the pandemic. Mortgage approvals have averaged around 85,000 per month and total transactions 111,000 per month since housing markets opened in June 2020, compared to around 60,000 and 90,000 in the prior decade, respectively. The pre-pandemic decade, however, may not be the right comparator. The 10 years following the financial crisis appear unusual in that over that period house prices grew broadly in line with incomes, having grown at double the rate of income in the previous twenty to thirty years. I want to look today at some of the reasons why house prices growth and housing transactions were, in UK terms, relatively subdued for the 10 years prior to Covid, and at what drives house prices and transactions.
(2011), "Risk off" 9  8  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  8  To help gauge the role played by these factors, we can consider the historic relationship between house prices and fundamentals and how this relationship might have evolved in the decade since the crisis11. The blue line in Chart 6 shows how we might have expected mortgage debt to evolve following the crisis, based on the historic relationship between mortgage lending and fundamentals such as the housing stock and incomes. This shows underlying demand falling in the immediate post-crisis period. This reflects weaker fundamentals. And to the extent that households’ beliefs are shaped by recent trends – and there is good reason to believe that is the case - weaker expectations will be captured in weaker demand. This fall in demand could also reflect credit conditions. In the years immediately following the crisis Bank Rate remained close to zero, but the interest rate spreads over Bank Rate charged by banks and building societies, for new mortgages, were high. This meant that interest rates on new mortgage did not fall with Bank Rate. But, as is shown in Chart 7, from 2013 onwards, mortgage spreads fell and the cost of mortgage credit dropped to well below pre-GFC level. 11  I have borrowed this thought experiment from Geoff Meen. It makes a number of simplifying assumptions, notably that there would not be feedback from higher demand into house prices in the counterfactual in which credit is unconstrained.