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

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

Is inflation about to drop as recession takes hold?
UK Economy

Is inflation about to drop as recession takes hold?

Central banks are raising interest rates in an attempt to curb soaring inflation. But will that push the economy into recession? John Stepek looks at …
5 Jul 2022
The MoneyWeek Podcast: nuggets of positivity in an extended bear market
Investment strategy

The MoneyWeek Podcast: nuggets of positivity in an extended bear market

Merryn and John talk about he need for higher wages and lower house prices, and why the fact that this is the least dramatic bear market they’ve ever …
1 Jul 2022
Car hire and the strangeness of the post-pandemic economy
UK Economy

Car hire and the strangeness of the post-pandemic economy

A global shortage of hire cars and unusually high hotel occupancy rates sum up the post-pandemic global economy in a nutshell, says Merryn Somerset We…
30 Jun 2022
Which house-price index is the best?
Property

Which house-price index is the best?

Britain is obsessed with house prices, and we have at least four house-price indices to choose from to measure the rate of increase in the value of ou…
30 Jun 2022

Most Popular

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks
European stockmarkets

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks

Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
3 Jul 2022
UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022
Persimmon yields 12.3%, but can you trust the company to deliver?
Share tips

Persimmon yields 12.3%, but can you trust the company to deliver?

With a dividend yield of 12.3%, Persimmon looks like a highly attractive prospect for income investors. But that sort of yield can also indicate compa…
1 Jul 2022