Advertisement

Why you should be glad that house prices are falling in “real” terms

House prices are now rising more slowly than inflation – could we see a soft landing for the property market? John Stepek hopes so.

181005-house-prices
A soft landing for house prices is good for buyers and sellers

© 2011 Bloomberg Finance LP

House prices are now rising at a gentle 2.5% a year, according to the latest figures from Halifax.

Consumer price index inflation, meanwhile, is at 2.7%. Wage inflation excluding bonuses is rising at 2.9% (we talk about wage inflation in the latest MoneyWeek podcast check it out here).

In other words, house prices are now falling in "real" terms.

Advertisement - Article continues below

Are we on our way to our hoped-for "soft" landing?

The housing market doesn't lack for analysis

To get an idea of how important house prices are to the UK economy, you merely need glance at the number of indices we have that claim to track prices in one way or another.

For inflation, we have quite a few indices, but they're mostly variations on a theme from the Office for National Statistics (a cynic might explain this as being the product of successive governments trying to gerrymander the figures lower I won't comment).

Similarly, for employment, you'll get the odd private sector survey recruitment agencies talking about ease of hiring and wages, for example but largely we all focus on the official data again.

But when it comes to house prices you're spoiled for choice. You could be reading about a new survey every other week.

Advertisement
Advertisement - Article continues below

We've got Rightmove, which looks at asking prices. We've got mortgage approvals, which looks at well, mortgage approvals. We've got the official house price index from the ONS.

Advertisement - Article continues below

We've got the niche indices from upmarket estate agents, that look at prime central London property, or country houses. We've got Hometrack, which looks at trends across UK cities.

But probably the best known pair of indices partly because they have some of the longest histories are the ones compiled by Nationwide and Halifax. These two take their data from somewhere in the middle of the buying process.

So the latest Halifax house price index will probably grab a few headlines this morning. Prices apparently fell by 1.4% in the month of September, which is a big drop compared with expectations.

Looking at the month-on-month figure is fairly pointless. It's quite a "noisy" data set. However, the year-on-year data is equally striking. In the three months to September, prices rose by 2.5% compared to the same quarter last year. Analysts had expected a rise of 3.4%.

That means not only that house price growth is still slowing (last time, according to Halifax, the annual growth rate was 3.7%), but also that house price growth is now firmly below inflation.

house-prices

In other words, house prices are falling in "real" terms.

Why a soft landing would be better for buyers and owners

This is good news. You want this to continue. Here's why.

Advertisement - Article continues below

From the homeowner's point of view, you shouldn't really care that much about what happens to the price of your house as long as you can continue to pay your mortgage.

But that's not the way things work. No one likes to see the value of their home fall, particularly if it then puts them into negative equity. So there's a psychological impact from falling house prices, which is not great for consumer confidence, and spending.

Advertisement
Advertisement - Article continues below

Moreover, widespread, sharp falls in house prices tend to be symptomatic of something else usually surging interest rates and a struggling economy. Rising borrowing costs not only push up mortgage bills, they also squeeze over-indebted businesses. That drives up unemployment and results in more forced sellers.

So a big house price crash is a messy way to get back to some sort of sensible housing market.

Instead, if the price of your house stays broadly flat, but your wages go up, then you don't get the psychological hit from a falling house price, and hopefully your mortgage also becomes more affordable relative to your pay packet. That's ideal.

Advertisement - Article continues below

Meanwhile, if you're frustrated by the unaffordability of property, then you might hope for a big crash. And I sympathise. Trouble is, getting a home loan when prices are crashing tends to be difficult. That's why the inflationary option can be more attractive even for those who don't already own property.

Basically, you want your wages to rise more rapidly than prices. If prices are flat or gently falling but your wages are rising, then it gets easier to save for a deposit.

So having made the case will this continue?

The good news is that a lot of heat has come out of the market. Buy-to-let investment is much less attractive these days. Not only are the tax changes still coming through, the fact that house prices are no longer soaring and therefore no longer seen as a "sure thing" will reduce the appeal of property as an investment.

Meanwhile, one thing mitigating against prices falling hard is that, despite mortgage rates ticking higher, as Samuel Tombs of Pantheon Economics points out, "households can offset the impact of rising mortgage rates on monthly repayments by taking out longer maturity loans, while payments as a share of disposable incomes still are low by past standards." He reckons that means that we're unlikely to see big falls in prices at a nationwide level.

Overall, I think a prolonged period of single-digit house price falls and above-inflation wage gains would be a nice way out of this affordability problem.

I think it's a definite possibility. That said, I'll admit that the experts at our recent property roundtable were less optimistic than me. But we can always hope.

(Subscribe to MoneyWeek now if you haven't already, to make sure you don't miss our future roundtables).

Advertisement
Advertisement

Recommended

Visit/economy/uk-economy/brexit/600759/brexit-begins-what-do-the-uk-and-the-eu-want-from-a-trade-deal
Brexit

Brexit begins: what do the UK and the EU want from a trade deal?

With Brexit now done, the trade talks can begin. But who wants what from a UK/EU trade deal, and how likely are they to get it?
3 Feb 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/520591/are-uk-house-prices-really-on-the-rebound
Property

Are UK house prices really on the rebound?

The latest house price data from the Office for National Statistics paint a picture of a housing market that is showing signs of rallying. That's not …
15 Jan 2020
Visit/519165/have-uk-house-prices-turned-the-corner
House prices

Have UK house prices turned the corner?

The average price of a house in the UK rose by 0.8% on the year in November, the fastest pace since April.
5 Dec 2019

Most Popular

Visit/investments/commodities/gold/601444/these-seven-charts-show-exactly-why-you-must-own-gold-today
Gold

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020
Visit/investments/stockmarkets/601460/disease-rioting-and-mass-unemployment-so-why-are-markets-soaring
Stockmarkets

Disease, rioting and mass unemployment – so why are markets soaring?

Despite some pretty strong headwinds in the last year, America’s S&P 500 stock index is close to all-time highs. John Stepek explains why markets seem…
4 Jun 2020
Visit/economy/eu-economy/601463/why-a-stronger-euro-is-good-news-for-investors
EU Economy

Why a stronger euro is good news for investors

The fragile state of the eurozone has for a long time brought the threat of deflation. But the ECB’s latest moves have dampened those fears. John Step…
5 Jun 2020