Like it or not, UK house prices appear to be rallying

The UK housing market seems to be perking up. But that may not be a good thing, says John Stepek.

UK house prices are back on the rise
(Image credit: Photograph (c) Ian Forsyth/Bloomberg)

In January, house prices across the UK rose by 1.9%, according to the latest Nationwide data. That doesn’t sound like much, and it’s still well below inflation. But it’s up from 1.4% in December, and as Robert Gardner, Nationwide’s chief economist, points out, that followed on from “12 successive months in which annual price growth had been below 1%”.

It also chimes with data from other surveys, including the most recent reading from the Office for National Statistics, which suggests that even before the election, prices were starting to pick up across the country.

We’ve pointed out on a number of occasions that the ideal would be for prices to continue to stagnate in “real” terms (ie, after inflation, and wage inflation specifically). That way, prices move closer to affordability, making life easier for everyone and taking some political heat out of the issue. Yet at the same time, you don’t get a crash threatening either household balance sheets or the banking system.

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However, with the economy still growing, the labour market healthy, and the most acute phase of political uncertainty in the past, it seems like it might be wishful thinking to hope for moderation in the one part of the UK economy most prone to epic boom and bust.

What might make the difference? Geopolitics is only tangential, and has the biggest effect at the higher end of the market. Local politics matters more, but given the crackdown on landlords that we’ve already seen, and the general mixed feelings towards Help-to-Buy, I don’t see the government making a huge difference either to supply or demand this year – that may change, we’ll see what’s in the Budget in March.

What matters most – as it always does – is the supply of mortgage credit. One reason prices perked up towards the end of 2019 is that mortgages became cheaper. The more people can borrow, the more they will pay and the higher house prices will go. It’s that simple.

So if you really want to know what’ll happen next, you have to look at interest rates. If the Bank of England decides to cut rates again tomorrow at Mark Carney’s final meeting as governor, then like it or not, I think a first half rally (at least) for house prices would be on the cards. If the Bank holds firm at the lofty heights of 0.75%, then perhaps we’ll continue to bounce along in the low-single digits, at least for now.

In the longer run, a healthy economy would point to higher rates. But given that central banks are not keen generally to hike rates again until they can see the whites of inflation’s eyes – that might be some way off.

We’re not saying you should rush out to buy a house – that’s not a decision you should predicate on anything other than your own circumstances and what you can afford (and investing in residential property as a landlord is hardly being encouraged by government policies just now). But don’t be surprised if prices start to pick up again.

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.