Britain's house prices are slowly sinking

A lot of people still believe that Britain's housing market is 'treading water'. It's not, says Merryn Somerset Webb. House prices have been sinking for years. Only London is keeping them above water, and that could be about to change.

Another week, another house price survey. The most recent comes from the Halifax, and shows a small fall in house prices in August (0.4%). That followed a decline of 0.7% in July, and a few small rises in May and June. Look back over three months and prices are down 0.3%. Look back a year and they are down about 1%. They are, says the survey, still at around the same levels they were three years ago, and are essentially "treading water".

A good many people think that is true. It's not. It isn't true if you take inflation into account; do that and prices are down more like 4%. They're also down 25% or so from their peak levels. It isn't even true in nominal terms unless you happen to live in a few areas of the South East and London.

House prices have been falling for most of us, most of the time for nearly five years now. Prime country houses are down 5% year on year on Knight Frank numbers, for example (so make that 8% plus in real terms) and a quick skim through auction sale numbers will show you that prices in some areas in the north of England are down 40%.

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The Halifax reckons its index won't fall for much longer. Why? The usual reasons: interest rates are low, inflation is not as high as it was, and our unemployment numbers are less awful than expected. This means that "spending power should be on a gradual uptrend", something that is likely to "support housing demand and therefore house prices".

I wouldn't be so sure. The resilience of employment is more about part-time than full-time jobs. Incomes are still rising more slowly than inflation (the Vocalink Take Home Pay Index shows pay rising at a rate of 2.3%). And, despite the government's constant announcements of new ways to make banks lend, mortgages are still both hard to get and more expensive than you might think.

Not convinced? Look at the mortgages available. According to, there are 25% fewer 90% loan-to-value mortgages on the market than there were a year ago. And the average mortgage fee being charged at the moment is £1,500. In 2008, it was £899. So while supply is high (agent Henry Pryor notes that 30% of sellers are desperate enough to have cut their asking prices), demand is low.

But there are two other reasons why you might think that most price indices will keep drifting downwards. The first is the regular announcements of building plans this week we have been told of a barrage of ideas, the upshot of which is to be 70,000 new homes.

Adding new capacity into markets where falling prices suggest existing overcapacity isn't usually a good thing for prices (although the multiplier effect of the construction on GDP numbers can be a good thing for governments). Indeed, as the British Property Foundation says in its analysis of the plan, "simply building homes for non-existent buyers has been tried before, in Spain and Ireland, with disastrous consequences".

The second reason is London. Most indices are being held up by the stunning success of prime central London (PCL) prices now 14% higher than they were in 2008. But these prices don't reflect the real economy.

Look at the nationality of the buyers. Demand from the City of London has fallen (very few people are making what they would consider 'real' money any more) with the result that in the £2m plus market only 47% of Knight Frank buyers are from the UK. The rest are from another 61 nationalities, up from 36 in 2008. The point is that buying PCL is more about safe havens than happy homes: chart the yield on PCL against gilt yields and you will see they match up rather nicely. So to assume that prices in London will keep rising, we need to assume that the foreigners will keep coming.

Will they? It's hard to imagine that 20% of the market will keep being supported by Europeans, as it is now if you are a rich Italian and you haven't bought yet, you probably aren't going to.

The Chinese and the rest might keep coming (various nationalities have various reasons mostly not good for wanting their money away from home). But London isn't as welcoming to other people's capital flight as it used to be: Knight Frank's Liam Bailey points to our recent changes to stamp duty and capital gains tax (aimed at foreign buyers) and, given today's general anti-rich fury, predicts more of the same. It hasn't made a difference yet. But add it to predictions of fast rising supply (15,000 new PCL units are planned) and a little more stability in Europe, and it soon might.

If it does and London prices stop rising at today's speed it will become increasingly difficult for anyone to keep up the pretence that the UK housing market is 'treading water' or 'flatlining' when it just isn't.

This article was first published in the Financial Times


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Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.