What are the odds on the ideal outcome for UK house prices?

For those who viewed their property as a pension, it may be time to think again

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UK house prices are now rising at the slowest rate since 2013, according to the Office for National Statistics.

At 3%, they are barely ahead of the Bank of England's official inflation gauge (CPI, at 2.5%), and they're behind the one everyone else uses (RPI, at 3.2%).

Meanwhile, unemployment continues to slide, which should gradually push wages higher.

As regular readers will know, our "happy ending" for the UK housing market involves wages rising a lot faster than prices (which ideally stagnate or gently decline).

That way people with houses aren't completely ruined, but people without houses can afford to buy them.

So what are the odds of it actually happening?

Will we get a happy ending for the UK housing market?

Our "fingers crossed" scenario for house prices is that we see a stagnation or gentle decline. If prices stay static or see mild falls, then it shouldn't hurt homeowners too much. People who were vaguely relying on their properties as their pensions may need to rethink their plans, but that's a longer-term problem.

The most marginal, over-leveraged buyers might be at risk. But even then, the most marginal buyers are also likely to be on some sort of government-funded "Help-to-Buy" scheme, and the last thing the government wants is for that to collapse into some horrendous mis-selling scandal. So there would probably be more "help" available on that front if necessary.

The other side of our "fingers crossed" scenario is for wages to rise more rapidly than inflation, and importantly, house prices. That will make prices more affordable and probably more quickly than you'd think and that'll help to fix our housing problem.

How likely are we to see this?

Let's see. On the house prices side, the answer is "so far, so good". The big factors driving the boom easy money plus a new source of demand, from landlords have both been knocked on the head. With interest rates going up, money is getting tighter, rather than cheaper.

And if you haven't already joined the landlord bandwagon, then it's too late now. The number of buy-to-let mortgages taken out in June was down nearly 20% on this time last year, notes James Pickford in the FT. George Osborne's tax changes are having their desired effect.

So the fuel for further gains has run out.

As for precipitous collapses, a house price crash is driven mainly by one of two things. One, if credit totally dries up, no one can buy. That hits prices (as buyers can't get mortgages anymore), but it doesn't hurt existing owners. That's what happened in 2008.

Two, if credit becomes much more expensive, then not only do houses become far less affordable for buyers, but existing owners also can't pay their mortgages anymore and so become forced sellers. That's what happened in the early 1990s.

The first scenario a repeat of the banking crisis, effectively seems unlikely, simply because we know what would now happen in such a scenario the Bank of England would print money.

The second scenario could potentially arise if inflation takes off, and the Bank is forced to raise interest rates a lot faster. I wouldn't entirely rule this one out but I think it's a slightly longer-term worry, partly because inflation may take a while to get going, but mainly because most home loans are fixed for the time being.

So stagnation rather than collapse does seem the more likely scenario for now. Particularly as a certain amount of increased physical housing supply (and it is increasing) hits the market, which will help at the margins.

Wages still aren't rising fast enough (assuming you aren't a CEO)

But what about the affordability side of things? Remember, we want to see a nice healthy gap ("spread") between the rate of house-price increase and the rate at which wages are rising.

The issue here is that even although unemployment in the UK is now at its lowest level since 1975, wages as with everywhere else in the world are still not rising at a particularly impressive rate.

Figures out yesterday showed that unemployment fell to 1.36 million in the three months to June, while the unemployment rate fell to 4%. The last time it was this low was in the three months to February 1975.

And yet, despite the tight labour market, wages just aren't picking up particularly fast. They rose at a rate of 2.7% in the year to June. (FTSE 100 CEOs bagged an 11% pay rise, as all the headline are pointing out today, so at least some things don't change.)

That's better than CPI, which we just learned came in at 2.5% in July. But it's still lower than official house-price inflation (using the Office for National Statistics figure) of 3%, and it's also lower than the old-school retail price index (RPI) measure of inflation (currently at 3.2%).

So what's happening to wages? All I can say is, I reckon this is a matter of time. As my colleague, Merryn Somerset Webb, has pointed out on her bloga number of times, British employers aren't used to having to invest in their staff or in higher productivity. They've had a ready supply of cheap labour from the European Union for a long time.

That's changing now. The number of EU nationals working in the UK in the second quarter fell by 86,000, the steepest drop in 21 years. If the supply of cheap labour is falling, then employers may have to pay higher wages whether they like it or not.

There are of course, a lot of risks to this scenario. The most obvious ones are to the downside. Politicians could change the rules again I suspect the most likely changes (a wealth tax, say) would be bad for prices, rather than good.

Or the cycle could turn and we go into another recession. Unemployment rises, any pressure on wages drops, and while house prices probably fall, the affordability picture doesn't necessarily improve greatly.

Or the Bank of England panics and opens the credit floodgates again, or the government tosses out more sweeteners for first-time buyers.

Anyway, like I said, fingers crossed.