While it’s been widely reported that UK house prices have experienced a modest dip of 2.8% in nominal terms since their peak in March 2022, inflation’s role has largely been underplayed. Actually, when adjusted for inflation, house prices have plummeted by a significant 13.4%, according to comprehensive analysis conducted by Savills using the Nationwide house price index.
This stark contrast in figures means that, in real terms, the average house price hasn’t climbed above late 2015 figures. The culprit? Surging inflation rates. “The surge in inflation has led to a more profound adjustment in the average price of a UK home in real terms,” explains Lucian Cook, Savills’ residential research director. Consequently, homeowners who made purchases after December 2015 are likely facing a real-terms devaluation in their property’s worth.
A Regional Dive: The Uneven Impact
The descent in house prices isn’t uniform across the UK, with some regions still struggling to clamber back to their pre-2008 financial crisis figures. Savills’ research pinpointed areas such as north-west England, Yorkshire and the Humber, and the West Midlands, alongside nations like Wales, Scotland, and Northern Ireland, where real-terms prices are significantly lagging behind their peaks from over a decade ago.
For instance, real-terms prices in northern England have tumbled by 27% since their pinnacle in the third quarter of 2007. During the same timeframe, Yorkshire and the Humber witnessed a 21% slide, the East Midlands an 11% dip, and Wales a sharp 18% drop.
Inflation Versus House Prices: The Silent Battle
Despite a potential increase or stability in the nominal value of homes over recent years, inflation has stealthily eroded their intrinsic value, Cook explains. The last era when house price growth robustly outpaced inflation for a considerable duration was between the mid-1990s and 2007.
The UK has endured a spell of soaring consumer price inflation, which, excluding housing costs, remained above 10% for seven consecutive months from September 2022 to March 2023. Though it retracted to 6.7% in the year leading to August, the rate is still high.
Interest Rates and Mortgages: The Domino Effect
Responding to inflation, the Bank of England enacted a drastic interest rate hike from 0.1% to 5.25% since December 2021, inadvertently nudging mortgage rates upward and cooling housing market demand. Despite a recent competitive scramble among lenders leading to a reduction in fixed rates, the average five-year fix currently stands at 5.93%, a steep climb from 2.55% in October 2021, reports data analyst Moneyfacts.
However, there’s a glimmer of hope, according to Rachel Springall, a finance guru at Moneyfacts. She notes a consecutive two-month descent in the average two- and five-year fixed rates, signaling potentially lower-cost deals on the horizon for borrowers.
What Lies Ahead: Predictions and Possibilities
Cook anticipates a “gradual normalisation” of Bank of England interest rates beginning next year, potentially alleviating some pressure on mortgage affordability. However, he remains skeptical about the housing market entering a new epoch of robust “inflation-plus” house price growth anytime soon.
This uncertainty begs a critical question: has the era of asset price inflation significantly outstripping underlying inflation rates ended, and if so, when might it return? “The future of interest rates will be a crucial determinant,” Cook concludes, leaving investors and homeowners alike pondering the road ahead.