House prices in the UK are still gently falling in real terms

House prices rose by 0.4% in October, and are now rising more slowly than wages or wider inflation. So, in “real terms”, they’re falling. That’s great news, says John Stepek. Here’s why.

191029-house prices

UK house prices are falling, after inflation.

Time's getting tight! Book your ticket to the MoneyWeek Wealth Summit on 22 November now we've just added the FT's Gillian Tett to our already stellar roster of speakers and panellists you really don't want to miss this (oh, and if you happen to need CPD, you can get six hours' worth by attending). Book now!

Nationwide has just released its latest house price figures.In October, house prices were 0.4% higher than they were a year ago. Your average UK home will now set you back £215,368 exactly. Prices are rising more slowly than wages or wider inflation. That means they're falling in "real" terms. That's great news...

Slowly falling house prices are a good thing

This morning's figures from Nationwide show that UK house prices are still pretty much flat, and falling after inflation.

The economy is OK. Interest rates are low. Employment is high. Those things are likely to prevent an all-out crash.

On the other hand, rates probably can't go much lower, while the impact of the effective removal of landlords from the housing market is still rippling through the market.

And while the resolution of Brexit might boost sentiment or activity at one level, it is also likely to lead to slightly higher interest rates, which I suspect would help to prevent a massive rebound in prices.

This is all good. As the Nationwide chart below shows, this means that affordability is gently improving.

191029-house prices

UK house prices are falling, after inflation.

I hope this continues. You've heard me say that dozens of times by now, but I like to keep reiterating it, for a couple of reasons.

One reason is that, here in the UK, we are rather attached to the idea of ever-rising house prices. I think it would be helpful for us to shed this attachment and instead recognise that hoping for a house to provide both shelter and a retirement income is a recipe for a high-stress existence.

This is unfortunately, as yet, a minority view. My colleague Merryn keeps a track via Twitter of the "how celebrities invest their money"-type interviews in the Sunday papers.

She's always very excited to spot the occasional sensible celeb who not only has a pension, but also understands that said pension holds equities. However, mostly celebs say something along the lines of "I own property. The stockmarket's just a casino. You can't go wrong with bricks'n'mortar."

There's this weird notion that investing in stocks is faintly immoral gambling, whereas taking a punt with borrowed money on the housing market (competing with people who just want a roof over their heads in the process) is honest in some way.

Anyway, once people stop making fast money from property, that will hopefully start to change.

House prices are not about physical supply and demand

The second reason stems from the other end of the spectrum. I've noticed that the tenor of columnists getting annoyed about the "housing crisis" is becoming increasingly hysterical, probably because we're coming up for an election (at some point) and housing is a political hot button.

The answer for these writers is always to "build more houses", because it's all about supply and demand. The problem is that it's not that simple.

It's interesting that we've become obsessed with the idea of building more homes at a time when in many parts of the UK outside London double-digit house price growth hasn't been seen for over a decade.

You can certainly argue that the planning system is flawed (it is) and you can certainly argue that there are not enough houses in certain areas and too many in others, and that the quality overall is poor.

And you can certainly argue that there's really no need for British homes to be the smallest in Europe. Yes we have a relatively big population but we're not jammed in that tightly.

But a blanket policy of just "building more" won't help. House prices are high because the cost of borrowing is low.

Put very simply, here's how it works. At interest rates of 10%, a £900 monthly payment will pay for a 25-year repayment mortgage of £100,000. At interest rates of 2%, £900 a month will buy you a 25-year repayment mortgage of just over £210,000.

That's why house prices go up when interest rates go down (assuming credit conditions slacken at roughly the same pace). Because the amount you can borrow to pay for the same house goes up.

It's that straightforward. Physical supply and demand does have an effect of course it does but it's marginal relative to the effect of the supply of credit.

So here's the good news. Interest rates can barely go much lower, and rules around mortgage lending are tighter than they once were (there are still signs of lenders getting more excitable again but we're not back in Northern Rock territory yet).

Meanwhile, wages are rising. So overall, rising wages should improve affordability while stable interest rates keep a lid on house price growth.

So we make some headway into the frustration caused by unaffordable homes, while buying ourselves time to take a more considered view and put in place deeper reforms that might put an end to the perpetual cycle of boom and bust.

OK, if I'm honest, I'm not optimistic about that last point it would require too much long-term thinking. But having a bit of a breather at least from house price woes would be healthy for us all.

Recommended

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
Pandemic no barrier as house prices rise faster than at any time since 2014
House prices

Pandemic no barrier as house prices rise faster than at any time since 2014

December saw the biggest annual rise in house prices for over seven years, as buyers rushed into the market to be sure of completion before the end of…
19 Feb 2021
The house price boom of 2020 shows signs of slowing in 2021
House prices

The house price boom of 2020 shows signs of slowing in 2021

Last year’s big rises in UK house prices looks to be running out of steam, reports Nicole Garcia Merida – 2021 could see a very different picture.
12 Feb 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021