Britain has an unhealthy obsession with house prices, particularly during those relatively rare periods when they are falling rather than rising. So news that the cost of a home has fallen for four months in a row will inevitably lead to speculation about a property crash.
It isn’t happening. Yes, it’s August and there’s not much news around, but even so the idea that a 2.4% annual fall in prices means the property market is in crisis is nonsense. Asset prices can go down as well as up, and a correction was always likely after the post-lockdown boom. That correction has been made inevitable by the sharp increase in mortgage rates over the past year.
Indeed, the real story is not of Armageddon in Britain’s leafy suburbs as owner-occupiers reel from negative equity but of just how resilient the housing market is proving to be.
It’s worth putting the latest 0.3% drop in Halifax’s measure of property prices into context. The cost of the average home is now 2.4% lower than it was a year ago, a period that has seen the Bank of England raise interest rates from 1.25% to 5.25%.
The typical property is still worth £45,000 more than it was before the pandemic arrived in early 2020, and prices have changed remarkably little in nominal terms over the past six months.
Taking inflation into account, the falls in prices over the past year have been about 10% in real terms, but the surprise is how modest the market shake out has been. There are reasons for that. Unemployment is low, there are plenty of job vacancies and, on current trends, wage growth will soon be rising faster than prices. Widespread forced selling, of the sort seen in the early 1990s, would certainly lead to a real house price crash but the conditions for that now do not exist.
Instead, what’s happening is that buyers are responding to sharply higher borrowing costs in an entirely predictable manner. They are opting for smaller properties that they can still afford and they are less willing to pay inflated asking prices. Sellers, who for the most part don’t have to move, can see that this is a buyers’ market and are reducing prices, but only slowly and with some reluctance.
This process has further to run. The labour market has started to turn down, and unemployment will rise in the coming months. The interest rate on a two-year fixed rate mortgage is now a little shy of 7% – more than four percentage points higher than it was when the Bank started raising interest rates in December 2021.
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Britain is a relatively small country, with strict planning laws and a tax system that favours owner-occupation. It is reasonable to assume that, over time, house prices will start to rise once more. Not just yet, though. Martin Beck, an economist with the EY Item Club, says house price falls are more a slow puncture than a serious correction. There is still plenty more air to come out of the tyre.
