The Great British public: still hopelessly optimistic on house prices

A new survey reckons that well over half of us expect house prices to rise in the next six months. The reality, however, will be rather different.

There is a view that the British are a generally pessimistic lot. But look at the latest survey out from Zoopla and you will see that it simply isn't so. We are, in fact, a stunningly optimistic population.

What makes me say this? The fact that 65% of us think that house prices will rise in the next six months.

Given that house prices and asking prices are falling in both nominal and real terms; that the economy is a seemingly hopeless mess (the IMF has just cut our growth forecast for the year to a pathetic 0.2%); that the mortgage market is as tight as ever (something the same homeowners accept only 10% of them think that finding a mortgage has become easier); and that estate agents are reporting two sellers for every buyer, this is heroic stuff.

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In the face of all the facts, the British population might be prepared to slash a little off their nutty asking prices every now and then, but they aren't giving up on the bubble-price dream.

I suspect that this is partly to do with the way in which house price growth is diverging in the south and the north. Limited falls in the south (and rises in London) mean that average prices don't look like they are falling much (and often not falling at all in nominal terms). That makes everyone in the north think things are better than they are and everyone in the south convinced that nothing is wrong.

This might soon change. According to a note from Capital Economics, the current divergence in house price inflation (about 12 percentage points between the best and worst regions London and Northern Ireland respectively) is far from unusual. Since 1975, the average gap has generally been higher (19 percentage points) and it has "only fallen into single digit territory in 17 of the last 150 quarters."

The pattern of house prices rising in one area and falling in others is also nothing new it happened in the 1980s and 1990s, too. The point is that the recent behaviour of the market (sharp falls in the north, smaller falls in the south) mostly reflects the fact that during the bubble house prices in the north rose far too much relative to house prices in the south. The divergence has now brought relative prices back more or less to their long term underlying trend (where a house in the south costs 1.6 times one in the north).

If you are an optimist, you might think this can only be good news. If prices are in the right place in relative terms, they should now move together: so price gains in the south should mean stability at worst and price rises at best in the north.

If you are a realist, however, you might think, as Capital's Ed Stansted does, that with house prices everywhere still overvalued and mortgages in short supply, "further falls in the north will ultimately undermine prices in the south." We are generally realists.

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.