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

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.

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.

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.

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.

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.

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.

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).

Recommended

No let up in house price rises as new records set
House prices

No let up in house price rises as new records set

House prices continued to boom in April, with £20,000 being added to the price of the average home in the last 12 months.
14 May 2021
Cheap money lifts UK house prices
Property

Cheap money lifts UK house prices

UK house prices have risen at their fastest pace in 17 years.
6 May 2021
Why are house prices so high? And what could make them more affordable?
House prices

Why are house prices so high? And what could make them more affordable?

House prices in the UK are at an all-time high – but they just keep going higher. And that’s not because of rich foreign buyers or a lack of supply, s…
23 Mar 2021
Why the Budget means house prices are likely to continue higher this year
Budget

Why the Budget means house prices are likely to continue higher this year

For a while, it looked like house prices might cool off a little this year. But after the Budget, that seems unlikely. John Stepek explains why.
4 Mar 2021

Most Popular

How will Joe Biden’s capital gains tax rise affect crypto prices?
Bitcoin & crypto

How will Joe Biden’s capital gains tax rise affect crypto prices?

The US president wants to increase capital gains tax – and that’s going to hit a lot of American cryptocurrency speculators. Saloni Sardana looks at h…
14 May 2021
Are we nearing the end of the negative bond yield era?
Government bonds

Are we nearing the end of the negative bond yield era?

As inflation gets going, the era of the negative bond yield – that investors have to pay governments for the privilege of lending them money – might b…
14 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021