Where are house prices going?

What do British politicians care about more than anything else? The answer is house prices. Most of us either have, or hope one day to have, the majority of our wealth tied up in our house. At the same time, the instability of, and regular raids on, pensions of all sorts have worked, as Dominic Lawson puts it in The Sunday Times, to make property acquisition more attractive than almost any other long-term investment.

So we all watch property statistics – asking prices, selling prices, transaction levels, mortgage volumes – endlessly, while running non-stop mental calculations on where we would be financially if we sold. That’s why every time a politician wants to “throw his opponents into confusion”, he chucks house prices into the debate.

So we talk about house prices whenever we talk about immigration (new demand will push them up); about energy (wind farms and fracking will push them down); about new runways (down); and about loosening planning laws (down).

Some of us might like the idea of falling house prices. But for the government, this just isn’t an option. Older people are both more likely to vote and more likely to own a house and they don’t like falling prices. Besides, we can’t afford any more bank bail-outs and our banks can’t afford much in the way of repossessions.

Lawson points to recent research from Morgan Stanley showing that Lloyds has only £314m of capital set against the risk in its £143bn of “high-quality mortgages”. That’s a buffer of 0.2%.

The point is that the British housing market is no longer a free market – it is a political market – and that makes it rather harder to forecast than it should be. House prices, in real terms at least, are down well over 20% since the start of the crisis.

But without the endless interventions in the form of ultra-low rates, forbearance, and various schemes to help the housebuilders flog overpriced houses to unsuspecting first-time buyers, that number would be more like 40%.

So what next in this great battle between market and state? Given the constant state interference, it is hard to forecast huge falls in nominal terms. But it is still all but impossible for those with small deposits to get mortgages; real incomes are still falling; and housing transactions remain very low by historical standards, so it is hard to see them rising much either.

The optimistic (most commentators) reckon the state will win – and that sold prices will rise by something like 2% next year in nominal terms. That may happen (although I suspect a fall of 2% is more likely), but even if it does, with inflation at 2.7%, house prices will still be falling in real terms. It’s also worth remembering that a lot of people want to sell but won’t sell at the prices they get offered. One day they will give in.

  • Luke

    “It’s also worth remembering that a lot of people want to sell but won’t sell at the prices they get offered. One day they will give in.”

    Ask a gold trader to sell some gold and she looks for a bid; ask her to sell her house and she looks for an offer.

  • Chris

    What do British politicians care about more than anything else?


  • jackanory

    “one day they will give in” They surely will – Debt, death and divorce.

    Your not just christmas cracker
    Happy Xmas

  • Sha

    Hi Merryn,

    Congrats on another year of useful and thought provoking reads. I wonder if an approach of fewer but better / well thought out content is considered? Would certainly be well advised.

    In this case, have you considered the fact that your own house purchase may have biased your views somewhat? It is also difficult to both fully consider all the key factors that influence prices and the subtle effects thereof.

    Happy xmas.


  • Myki

    This is the second article I’ve red from Money Week that’s moved to more neutral ground away from the usual bearish stance on the property market.

    With the incoming governor of the BOE (and some of his contemporaries) planning to set interested rates based on employment rates and not inflation, it suggests to me they are going to allow inflation to take off, devaluing money and forcing consumers & corporates to unlock their war chests and start buying all and sundry of asset classes.

    Stoking up on debt (which will devalue rapidly) looks like the way forward, right?

  • Ellen

    @5 Myki. To allow inflation erode debt and devalue currency surely we is going to need wage inflation also. Housing is already out of reach of too many people. If their wage packets are going to be reduced in value against what they need to pay for housing – this will surely make the housing crisis much worse.

    There are enough empty houses all over the place without encouraging more people, who do not need them, to buy them up at the expense of the people who need them – but are unlucky enough to be paid in sterling.

  • Myki

    6. Ellen – surely with low unemployment rates, wage inflation must pick up as the labour supply tightens and market forces kick-in.

  • Roberto Birquet

    This government had the opportunity to allow the market to deal a blow to house prices. When it came in, had it allowed the market to fall – banks realising losses to their balance sheet through repossessions, immediately banning self-cert loans, setting 20% as min deposit for at least the first parliament, forcing land hauding companies to either build on or sell their land.
    But they did not and they can no longer do so and tell the older, the baby boomers etal, it was due to the last govt. Instead, they focused on govt debt – the least of our problems, and blamed the last govt for that instead. The result is a zombie housing market: The old can’t equity release anymore, and the young are faced with £50-100k deposits, meaning no money to spend in the shops. And that means a zombie economy. Well done Mr Osborne – out of his depth.

  • Roberto Birquet

    5 and 6. I have thought all that too. And 6 is right: If money devaluation is the aim, nominal wages will have to rise, as the price of milk doubles.

    It has nothing to do with point 7, and besides unemployment is not low; it’s high. Even much of the rise on jobs has been part time.

  • NeutronWarp9

    Since debt got us into this mess in the first place the chance of Myki’s scenario arising is nil. Inflation is a key target for the MPC and the unemployed – be them homegrown or welcome guests – can go swivel under this government. A ‘flexible’ (desperate and insecure) workforce is an essential environment in which the wealth creators can thrive. Wage inflation for the masses? No chance.
    In a return to Victorian values the masses should rent, get off the roads and die early.

  • Nick Name

    All else being even the state WILL win. However, will everything else stay even?

    They’ve had a good year really: the euro is still here; everyone’s still in the EU; no-one’s called Draghi’s bluff (yet); Obama got re-elected; China didn’t invade anyone and the Saudis are still our friends.

    Will all those things hold for another 12 months?

    Inflation is largely outside of their control now with most of our consumption being imported. If the US or EU economies improve Sterling will get weaker relatively (I think it’s a given the UK economy is not going to improve in that time) and imported inflation will get worse.

    If it breaches 6% they are going to be forced to raise interest rates: those “Older people” are also a lot more likely to be savers. (No doubt they will have other tricks up their sleeves more specific to the housing market, but they can’t insulate it indefinitely.)

  • Nick

    For me it is simple:

    -If house prices stay the same or rise, then that means that the pound will have to be devalued again (see limited money in pounds!)


    -if they fall, I will buy.

    The state can win, but it will take the pound down so will be prepared.

    Also please beware that tenants, savers are getting really upset now with the subsidised housing market. Their intention to vote might increase substantially.

  • Phil

    As with this year, there will be huge regional variations in house price inflation.

    There’s likely to be continued falls in Northern Ireland, most of Scotland except Aberdeen, and most of England except greater London and its surrounding commuter towns where we’ll see rises of around 5%. At the other extreme, central London prices in the 300K-1 million range are likely to rise 10-15%.

  • Daisy

    Any government with a mandate to create more owner occupation and to reduce the cost of housing in general, to release more of our disposable incomes to spend elswhere in the economy, only need to look to the early 20th centry. Rent freezes, improved tenant rights, long term rental agreements etc. were all brought in to improve living standards, at times of national chrisis and in their aftermath. There are plenty of options open to a government wishing to reverse a housing chrisis including taxation or regulation of the buy-to-let/rental market.

  • Terry Bradford

    Price is determined by the forces of demand and supply. But it is misleading with property, because the basis of buying houses is through mtges and as MSW points out the monthly sub is influenced by world int rates and by political policy. So the buyer not only looks at the SP but the affordability of the monthly sub.The buyer compares the monthly sub to the rent for an equivalent pty. So if int rates increase prices will drop. The head of UKAR said expect a tsunami if rates increase.
    My concern is that hse prices are out of kilter with building costs. In the case of detached hses just workout the replacement cost and you will see it is about 50% of the hse value.The difference is the land price which traditionally was about 10%. In the 1970’s prices increased because inflation was high and building costs were increasing. Now it is land both for existing houses and new builds (housebuilders have land banks reflecting high land prices).


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