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For a while now, we’ve been pointing out that house prices have been falling in “real” terms – ie, after inflation.
This is no bad thing, especially as wages are starting to rise in real terms. We should be hoping for houses to become more affordable – the less people have to spend on necessities, the more disposable income they have.
Now the pace is picking up. House prices in many parts of the country are falling in nominal terms too.
So what’s next? Will prices continue to fall gently – or is the slide set to accelerate?
House prices in London are falling hard
According to the latest data from Nationwide, house prices across the UK rose by 0.7% in the year to March. That’s well below the rate of both price inflation and wage inflation.
However, the national average also masks some pretty hefty falls. Prices in Northern Ireland and Scotland are still rising – up 3.3% in the former, and 2.4% in the latter. Wales, meanwhile, slowed sharply to 0.9% growth from 4% last quarter.
But house prices in England fell year-on-year for the first time since 2012, with prices down by 0.7%. And this is driven pretty much entirely by the southeast, and London in particular.
Prices in London fell by 3.8% year-on-year. That’s the biggest drop seen since 2009 (which was when the market was recovering from the 2008 crash). And it’s actually the seventh quarter in a row of declining prices for London.
That said, there are good reasons for this. Nationwide also publishes a handy little chart which compares today’s house prices in each region with the price at the 2007 peak.
Prices in London are more than 50% higher than they were at the height of the last boom. And prices in every part of England, apart from northern England, have now surpassed or matched the 2007 level.
In Wales, however, prices are flat compared to 2007, and in Scotland they are still slightly lower on average. And in Northern Ireland – which is a special case, because it also got sucked into the epic Irish housing boom and bust – prices are still almost 40% lower on average than they were in 2007.
So you can see why London and the southeast are now being hit hardest by the slowdown – they’ve raced ahead of the rest of the UK.
A healthy correction
The question, of course, is what happens next?
As ever with house prices, this is primarily a question of credit availability. Put simply, whatever amount of money is available to be spent on houses will end up being spent on them. That’s quite an interesting phenomenon in itself, but it boils down to people’s tendency to borrow as much as they can to buy as much house as they can.
With interest rates still at near-zero levels in the UK, you might think it odd that prices have slowed. But as we’ve discussed before, there are some very obvious reasons why this has happened.
Landlords have been heavily restricted or cut out of the market altogether. New rules on mortgage lending to amateur landlords, alongside changes that have made investing in property a lot less tax-efficient, have clobbered demand from landlords. That has left the field to first-time and residential buyers.
London was always one of the main hunting grounds for landlords, so it was bound to be hit hardest by these rule changes. Indeed, when the rules first came out (and before Brexit) Deutsche Bank issued a report detailing why prices in the capital were likely to fall by around 20%.
(I wrote it up here back in mid-2016 and it increasingly looks as though DB were on the money.)
Of course, anything that hits the capital is likely to spill out. One reason that prices tend to rise in stages is because people who wanted to buy in London but couldn’t afford to, get pushed out towards the commuter belt, and people who would have bought there, get pushed out, and so on.
When prices in London decline, the process goes into reverse. Everyone can afford to live that little bit closer to wherever they work, which means the boost in demand reverses. Hence the knock-on decline in the southeast of England.
Now, as we’ve said countless times here, this is all good news. House prices have been unaffordable for way too long – it has become a major political issue. It’s also a constant potential threat to the financial system (property booms and busts are no platform on which to build a stable banking system).
Fixing that would be good, and it’s easier to get to grips with once voters stop seeing their home not just as a house, but as the pot of gold that will fund their retirement dreams.
For now, I still expect to see a long and slow stagnation. It’s hard to see credit becoming more easily available (not much room to cut rates from here), whereas it’s easy to see how it could get tighter (say Brexit actually all goes fine, and the Bank of England suddenly realises that it’s allowed to raise interest rates again).
If anything the risk is that prices do start to slide faster. But with employment high and rates low, it is hard to see how a proper crash gets going. We’ll see. But for now, this is healthy.