According to estimation, house prices have recently been witnessing a decrease, with approximately a 5% drop since the peak last year. However, as The Telegraph points out, inflation needs to be reckoned with. Analyses that factor in inflation indicate that property prices might have actually fallen by a staggering 14.5%, as suggested by research consultancy Capital Economics. Their projections also foresee a potential slide of up to 20.8% in “real terms”.
The Impact of Wage Growth and Inflation
Neal Hudson from BuiltPlace, a renowned property analysis firm, highlights how increasing wages, coupled with higher inflation, have largely facilitated the price correction we’ve been observing. With higher interest rates on the horizon, two possibilities arise: either property prices descend, or wages ascend, both contributing to adjusting the relative property prices.
A prevalent contributor to high inflation, wage growth has somewhat buffered against significant drops in property prices in nominal terms so far. Rising interest and mortgage rates usually lead to decreased property prices by limiting the borrowing capacity of potential owners. Yet, the record wage growth of the past year has somewhat offset this by enhancing buying power, exacerbating persistent high inflation, thus creating what is referred to as a “wage-price spiral”. However, Hudson also warns that price adjustments in the property market can be slow to materialize.
Learning from the past: The 2007 Crash and the 1970s Correction
To understand the potential trajectory better, insights from past downturns provide valuable perspectives. For instance, the real estate decline in 2007 saw property values fall 18.3% in real terms during the initial year, with a 5.1% fall in nominal terms. Ultimately, the property market plummeted by 22.6% in real terms and 19.4% in nominal terms, according to Capital Economics’ analysis.
Richard Donnell from the property portal Zoopla predicts that the coming years could witness similar real house price declines, akin to the last downturn. Primarily, high interest rates are expected to put downward pressure on property prices. Indeed, Hudson also notes that the current correction resembles the two property market adjustments experienced in the UK during the 1970s.
Inherent Limitations of House Price Indexes
Interpreting house price declines is complicated by the fact that common indices have intrinsic limitations. For example, the indices by Nationwide and Halifax, which are based on mortgage prices, only reflect data from their customer base, thus offering a limited view. Rightmove, another property website, provides an index of asking prices. However, the relevance of this index has been questioned by professionals such as Emma Fildes, from Brick Weaver, who argues that this index can misrepresent market conditions due to ‘overpriced’ listings.
Typically, sellers’ asking prices reflect their perceptions of their properties’ worth rather than the actual selling price. This gives potential buyers a false impression of bagging a great deal when a discount is applied. That said, the nationwide index is often lauded for its lower volatility and considered a leading market indicator by many experts.
The Silver Lining: Cash Buyers and Hidden Discounts
Cash buyers, who are currently enjoying larger discounts, represent a promising opportunity, albeit not captured in the Nationwide or Halifax indices. With rising mortgage rates creating potential instability among buyers reliant on borrowing, sellers are showing increased wariness towards transactions involving chains.
Moreover, discounts don’t always come in the traditional form. New builds, for instance, are increasingly sold with alternative financial incentives like deposit contributions instead of a straightforward lowered asking price. This practice aims to maintain the overall selling price of the new builds, a crucial factor considering that surveyors use the price of one new build to determine the value of the others in the same development.