More good news from the UK property market – house prices aren’t going anywhere

House prices in the UK are stagnating. Far from a disaster, that's very good news for everyone, says John Stepek. Here's why.

People looking in the window of an estate agent  © NurPhoto via Getty Images

We haven't looked at UK house prices for over a week now, so I know you'll be getting withdrawal symptoms.

So let's rectify that today. The latest figures from the Nationwide are out. They show that house prices are, basically, flat across the UK.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

That's very good news, for reasons we shall now explain.

The British housing market is ticking along nicely

The average house price in the UK rose by 0.6% year-on-year in August, according to Nationwide.

house-price-chart

Obviously, that hides a lot of regional variation. Broadly speaking, if you look at other surveys and data, prices are falling in London and the southeast of England. The further out you go from there, the stronger the growth gets.

Advertisement
Advertisement - Article continues below

But nowhere is booming, and outside the very top end of the market, it's hard to argue that anywhere is crashing either.

What's also notable is that the mortgage market seems to be ticking along nicely. Mortgage lending saw a solid rise in July, in terms of both the amount loaned out, and the number of loans written.

In other words, "despite Brexit", buyers are buying and sellers are selling they're just doing so at slightly lower prices.

We've said it before and we'll keep saying it: this is a good thing.

I sympathise with frustrated would-be buyers, but a house price crash would hurt

A house price crash although satisfying for some frustrated would-be buyers is a very disruptive form of bust. For a start, to have the conditions for a house price crash, you need to have rising unemployment or surging interest rates or both.

This creates a group of unfortunate people who can no longer afford to pay their mortgages, and so become forced sellers, or victims of repossession. These then feed on each other forced sellers drive down prices across the market, buyers see prices coming down and hold off buying for more falls, and so on.

Advertisement
Advertisement - Article continues below

On top of that, banks' balance sheets tend to be heavily exposed to property. So when property prices tumble, banks rein in lending on a wider basis. When banks stop lending, it makes it harder for companies to raise money, over-exposed companies go out of business, unemployment rises, and so on.

In short, a house price crash might be good for people who don't already own a house, but it creates a great deal of collateral damage in the process. It's certainly not the ideal way to go about dealing with affordability problems.

(The ideal way, of course, would be to avoid leveraging your economy so dramatically to the residential housing market, but we don't have a time machine, so that's not currently an option.)

What we have just now is the closest we're going to get to an ideal way of getting back to some sort of equilibrium. Prices in most areas are flat. Meanwhile, the UK is as close to full employment as it's ever been. And the gap between wage growth (at just under 4%) and house price growth (roughly 0%) is now really quite wide.

How to make house prices more affordable without crashing the economy

This is good. People can still pay their mortgages. No recent buyer is panicking about the fact that their house is "only" worth roughly what they paid for it, and home equity release stopped being a big driver of UK consumption before the 2008 financial crisis. (So it doesn't matter as much these days if houses are no longer "earning" more than the annual salary every year, because people aren't "unlocking" and spending that equity to the same extent as they once were.)

At the same time, because wages are rising faster than house prices, affordability is gradually improving. Going by the Nationwide data at least, affordability in the UK (in terms of average house price to average earnings) was at its worst in 2007, just ahead of the crash, at just under 6.5 times.

Advertisement
Advertisement - Article continues below

It got back up above six times or so around 2015, but the tightening of rules around buy-to-let really does appear to have had the desired effect. Affordability has been gradually improving over the last 18 months or so, and, fingers crossed, it will continue.

It would be nice if wages went up a bit faster. And it would be nice if house prices declined a little if you can get that gap (or "spread") between wage inflation and house price growth up to 5%-10% rather than the current 3%, then you might be surprised by just how rapidly affordability improved.

Of course, there may be an element of wishful thinking here. For this to continue, you're looking at another couple of years of solid employment levels and weak house price growth. That doesn't seem impossible. But equally, there are a lot of things that could disrupt it recession, of course, being the big one.

That's why it would probably be a good idea now that everyone is growing rather more used to the idea that a house will not inevitably throw off buckets of cash every year to look at ways of reducing our economy's overall vulnerability to a volatile housing market.

Unfortunately, that would point to a level of political long-sightedness that I won't be holding my breath for. But we can always hope.

Advertisement

Recommended

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/520466/gold-dont-panic-and-dont-sell
Gold

Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020
Visit/520221/heres-how-gold-could-rise-above-7000-an-ounce
Commodities

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019

Most Popular

Visit/investments/property/house-prices/600840/the-biggest-risk-facing-the-uk-housing-market-right-now
House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
Visit/currencies/600842/eur-usd-euro-slide-against-us-dollar
Currencies

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020
Visit/investments/stocks-and-shares/share-tips/600811/three-overlooked-stocks-to-buy-now
Share tips

Three overlooked stocks to buy now

Each week, a professional investor tells us where he’d put his money. This week: Joe Bauernfreund, portfolio manager at the AVI Global Trust, highligh…
17 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019