Within the space of a few months, BBC News reported the following: “House prices see biggest monthly rise for more than a year” (1 November 2023); “House prices end the year 1.8 per cent lower” (29 December 2023); and “House prices see first annual rise in over a year” (1 March 2024). Has the long-predicted housing crash fizzled out? Has the housing market had too many Babychams and begun wandering aimlessly up and down? No: it’s just that the way in which prices are measured is being changed to create a news story.
You can avoid confusing headlines about house prices in two ways: ignore them (if you can) or train yourself to think in real money. The latter is one of the best steps you can take towards financial literacy: the world changes subtly when you look at prices as relative values, rather than absolute numbers. Real prices are inflation-adjusted; nominal prices are a fiction that sits on top. Training yourself to question nominal prices can be useful for things such as choosing a bank account, asking for a pay rise (never ask for an amount: ask for a percentage relative to inflation), and making sense of house prices.
Saying that house prices have risen month-on-month is a fairly useless observation, and especially so during the autumn, the busiest time of year for housing transactions. It’s a bit like measuring Stilton prices between December and January: if you didn’t know about the Yuletide cheese binge, you would fail to understand the long-term trend.
A year is a more useful measure, but the trick with the other headlines is that they measure nominal values in a year when the cost of everything else (including the labour you sell to your employer) has changed a fair bit. A story can be told about rising prices, when in fact prices have fallen relative to the rest of the economy. What happened to the housing crash is that it happened, and continues to happen: from the first quarter of 2022 to the third quarter of 2023, inflation-adjusted house prices fell 12 per cent across the UK. Measured against their 2007 peak, the fall is still greater. Property in Northern Ireland has halved in value, relative to the price of everything else in the UK, over the past 17 years.
Sadly, this didn’t make housing any more affordable, because for the average UK worker real wages have not increased since 2008. With no increase in our purchasing power, we have been unable to benefit even when prices have been stagnant, and when they’ve been rising almost everyone has lost out.
The most recent forecasts from Zoopla and Nationwide are for (nominal) house prices to remain flat this year, which means they will fall in real money by the amount of inflation (expected to average 2.2 per cent). This gradual decay in prices could well become the long-term trend. The super-low interest rates of the past 15 years are probably a historical anomaly. That will be good for housing affordability – in London, buyers are already asking for an average £20,000 off the asking price – which will be great for everyone who wants to buy a home. Better still would be a successful reform of the planning system and the housebuilding market to allow for the creation of millions of new homes.
There will, however, be people on the other side of that equation: the people who have assumed that their house can replace their pension. The opt-out rate for auto-enrolment pensions has been rising since 2020, and first-time buyers are increasingly committing to very long-term agreements: half of all mortgages issued last year were on 30-year terms. It’s fine to pay for your house for 30 years if you’re paying for it as a home, but if you see it as a savings account you may be cruelly disappointed.
[See also: Abolishing National Insurance is a great idea]
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This article appears in the 03 Apr 2024 issue of the New Statesman, The Fragile Crown