Like a pigeon in a lift, the housing market is capable of rising and falling at the same time. It can flap towards the ceiling even as it heads for the ground floor, and that’s what explains the mystifying headlines that accompany the latest Nationwide house price index, describing a market that is simultaneously buoyant (“mortgage approvals rise in busier housing market”, reports the Times) and sinking (“UK house prices fall for second month in a row”, reports the same newspaper, on the same day).
The pigeon’s progress can be described differently depending on your awareness of the movement of the lift, and the same is true of house prices: the nominal values described by most headlines ignore the movement of the economy.
“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 (a “savings” account loses you money if it pays interest below inflation) and asking for a pay rise (never ask for an amount, ask for a percentage relative to inflation). They are arguably most important where the housing market is concerned because a house is the most expensive thing most of us will ever buy.
Beware the optimism of nominal price observations (“Asking prices leap to near-record high”, reported the Telegraph last week; “UK house prices near 2022 peak”, said the Guardian last month). They conceal a significant decline in real prices. Here’s how prices have really moved relative to the rest of the UK economy:
Whether you want to call this long-term trend a “housing crash” is up for debate: thankfully, tens of thousands of people have not been forced to sell their homes, but we are also seeing a strong and sustained decline in the real value of the assets that make up 36 per cent of household wealth.
In the two years I’ve covered in the graph (Dec 2021-23), the real value of UK housing fell by 11.5 per cent. In some areas the fall was much higher. When real-terms pay fell by this much, millions of workers went on strike.
On the one hand, a slump in the housing market is a good thing. No-one should mind if houses become more affordable. Even homeowners benefit: it becomes cheaper to buy a larger home, and your kids don’t have to live with you into their 40s.
However, there are two problems that a falling market exposes. The first is that housing isn’t really becoming 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.
The other, even larger problem is that after decades of being told that rising nominal house prices are a good thing, many people in the UK have followed this narrative, investing in the (nominal, changeable) value of their home for other savings, such as pensions. 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 is very possible that a gradual decay in house prices will become the long-term trend. The super-low interest rates of the past 15 years are probably a historical anomaly, and both major parties have plans to accelerate housebuilding. It’s fine to pay for your house for 30 years if you’re paying for it as a home but if you also depend on 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