In CityAM, economist Paul Ormerod shares his view of UK house prices – “House prices are on the rise because fewer people are selling, and fewer people are selling because they think their property has preserved its value. Once they give up, prices will fall.”
What’s Going On?
- House Prices Have Been Rising: In simple terms, the price of houses in the UK has been going up. Why? Fewer people are putting their homes on the market because they believe their houses are still worth a lot.
- Yet the Economy Isn’t Great: Despite house prices rising, the broader UK economy isn’t doing brilliantly. The economic activity, measured by something called GDP (Gross Domestic Product), isn’t as high as it was a few years back. This might sound confusing, but there’s an explanation!
The House Price Puzzle – Solved!
- Inflation’s Role: When we account for something called inflation (the rate at which the general level of prices for goods and services rises), house prices are actually about 8% lower than they seem. This means that while prices might seem higher in pure numbers, the real value of money has decreased, so the “real” price of houses has dropped. This has happened in the past too when the economy was slow.
- History Repeats Itself: Just to give some context, house prices have seen similar trends in previous years. For example:
- 1975-1977: Prices seemed to go up, but considering inflation, they actually dropped by 19%.
- 1990-1992: Real house prices dropped a whopping 31%.
- Late 2000s: Another big drop of 20%.
- Today’s Scenario: Compared to the past, the current drop isn’t too bad. Why? Because our economy is stagnant, meaning it’s neither growing nor declining much.
Signals from the Market
- Fewer Sales: Recent polls of property experts suggest that house sales are way down. To give a perspective, it’s as low as when the Covid-19 pandemic started in April 2020.
- Owners’ Reluctance: Owners are holding back from selling because they believe their properties have maintained their value. This mindset is not new; we’ve seen this in past housing market slowdowns. As a result, the market becomes stagnant.
- Shift in Belief: Over time, sellers will recognize the market trend. When a few start lowering their prices to attract buyers, it will set off a domino effect of more and more sellers doing the same.
The Bigger Picture
- Comparing to Stock Markets: Think of it like a stock market. Sometimes, all it takes is a few people to sell their stocks at a lower price to start a trend. Gradually, more people might follow suit.
- What to Expect: Based on the economy’s state and how the housing market looks right now, it seems like there might be more price drops on the horizon.
In a Nutshell: If you think your house is worth X amount today, the market might say otherwise. If this contradiction persists, people will eventually adjust their expectations and start selling at reduced prices. This will lead to a drop in overall house prices. It’s all about supply, demand, and perception!