Where are house prices going?

Analysts are forever trying to predict what will happen to house prices next. But Britain's property market is no longer a free market, says Merryn Somerset Webb. It's a political market. And that makes it very difficult to forecast.

What do British politicians care about more than anything else? The answer is house prices. Most of us either have, or hope one day to have, the majority of our wealth tied up in our house. At the same time, the instability of, and regular raids on, pensions of all sorts have worked, as Dominic Lawson puts it in The Sunday Times, to make property acquisition more attractive than almost any other long-term investment.

So we all watch property statistics asking prices, selling prices, transaction levels, mortgage volumes endlessly, while running non-stop mental calculations on where we would be financially if we sold. That's why every time a politician wants to "throw his opponents into confusion", he chucks house prices into the debate.

So we talk about house prices whenever we talk about immigration (new demand will push them up); about energy (wind farms and fracking will push them down); about new runways (down); and about loosening planning laws (down).

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Some of us might like the idea of falling house prices. But for the government, this just isn't an option. Older people are both more likely to vote and more likely to own a house and they don't like falling prices. Besides, we can't afford any more bank bail-outs and our banks can't afford much in the way of repossessions.

Lawson points to recent research from Morgan Stanley showing that Lloyds has only £314m of capital set against the risk in its £143bn of "high-quality mortgages". That's a buffer of 0.2%.

The point is that the British housing market is no longer a free market it is a political market and that makes it rather harder to forecast than it should be. House prices, in real terms at least, are down well over 20% since the start of the crisis.

But without the endless interventions in the form of ultra-low rates, forbearance, and various schemes to help the housebuilders flog overpriced houses to unsuspecting first-time buyers, that number would be more like 40%.

So what next in this great battle between market and state? Given the constant state interference, it is hard to forecast huge falls in nominal terms. But it is still all but impossible for those with small deposits to get mortgages; real incomes are still falling; and housing transactions remain very low by historical standards, so it is hard to see them rising much either.

The optimistic (most commentators) reckon the state will win and that sold prices will rise by something like 2% next year in nominal terms. That may happen (although I suspect a fall of 2% is more likely), but even if it does, with inflation at 2.7%, house prices will still be falling in real terms. It's also worth remembering that a lot of people want to sell but won't sell at the prices they get offered. One day they will give in.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.