What’s Ahead for UK Property Prices: Inflation, Interest Rates and Market Nuances

Oct 2, 2023 | Eyesurvey, Inspections

What’s in Store for Property Prices in the Upcoming Year?

The future of house prices is a subject of considerable speculation, and a major factor expected to have a significant impact is inflation, which could potentially reduce the value of housing by approximately 5% over the next year. This trend is not new and has already had a substantial effect this year. According to data from the Nationwide Building Society, real house prices in June experienced a decline of more than 14% when compared to levels in March 2022.

However, it’s essential to consider that whether prices rise or fall depends on the specific housing market under scrutiny. When we discuss UK house prices, we should clarify what we mean. Typically, we refer to properties that were bought or sold within a specific period. These properties can undergo significant changes over time due to market conditions, making it challenging to compare them during bullish and bearish market phases. Some housing markets are still experiencing growth, while others have been struggling since the lockdown. Hence, our conversation about house prices needs to become more nuanced.

It’s often overlooked that only 26% of households have mortgages. Many homeowners fully own their homes without a mortgage, and an increasing number of people are opting for renting. Consequently, focusing solely on the mortgage market, as some house price measures do, is becoming an increasingly specialized exercise.

We’ve enjoyed 15 years of historically low interest rates. Are we now entering an era of high interest rates, and how will this affect the property market?

Characterizing this as a new era might be misleading. In fact, we may be returning to an older era. To illustrate this point, consider that our expectations and language about housing are deeply rooted in the late 20th century, a unique period in history.

If we examine the two centuries leading up to the Second World War, the Bank of England’s base rates averaged around 4%, fluctuating between 2% and 6%. Today, we consider 6% interest rates as high and expect mortgage rates of 4% or 5% to be normal. This shift is akin to going “back to the future,” as it differs significantly from the high double-digit interest rates of the 1970s and 1980s, which profoundly influenced discussions about house prices and housing markets. We must adapt to a new way of thinking about housing in the 21st century.

The notion of housing as a “ladder” for young people to climb onto is outdated in today’s world. Instead, the housing market more closely resembles a high platform. While some may need assistance, such as a ladder or support from family, to access it, we need to shift our mindset away from the traditional view of the housing market as an ever-ascending escalator. In the current environment and when looking ahead to 2030 and beyond, we should anticipate a more stable market with low growth and low interest rates, which is normal when considering long-term historical standards.


Is 2022 likely to be the peak point for property prices in the foreseeable future?

In real terms, yes. However, much depends on the trajectory of real incomes. There is a correlation between average house prices and average real income growth, which has been rather lacklustre recently. Real house prices are still approximately 7% lower than they were in 2010. Although many still perceive nominal house prices as continually rising, the reality in real terms is different, and homes are not as valuable as they were in previous periods. The peak in real house prices likely occurred around the third quarter of 2007.

When comparing house price growth, both real and nominal measures have limitations. Examining how house prices relate to people’s earnings reveals that they have risen from around four to five times earnings in 2007 to 10 or 11 times today.

Is there such a thing as a perfect measure for house price growth?

The idea of a “perfect measure” is intriguing, though it’s essential to acknowledge the nuances in this context. We often focus on individual earnings, but it’s household income and disposable household income that truly matter. For many, especially young individuals, the primary affordability hurdle is accessing the housing market in terms of equity. Borrowing costs are less critical than the challenge of accumulating thousands or even hundreds of thousands of pounds for a down payment.

If you currently spend 50% of your income on rent compared to an interest-only mortgage, it only makes sense to buy if you anticipate the property’s future value to increase. However, if we shift our perspective from housing being a ladder to a platform, we must consider the possibility of rising rents or declining housing prices, in which case waiting to buy might be a prudent choice.

In the segments of the market we’ve observed, building costs remain high while house prices remain relatively stable. There isn’t much room for profit margin if you invest in a property that requires renovation. Furthermore, price increases and building costs have not been factored into fixer-upper homes. What can we expect for this segment of the market?

The absence of rising house prices doesn’t mean there are no investment opportunities at present. It’s intriguing to note the resurgence of interest in fixer-upper properties. Concerns about construction costs and overall expenses are valid, but it highlights that value can be found in property through various means. Identifying popular, prosperous places with increasing productivity, particularly those attracting young people, is one avenue for discovering value. You don’t necessarily have to physically renovate properties; identifying qualities that align with new demand can also yield returns in a stable-price market.

When we reflect on the 2008 housing crisis and subsequent recovery, it’s evident that the pace of recovery varied greatly by location and specific market segments. What can we anticipate in the future?

Examining the rental market can provide valuable insights, as it reflects a fundamental phenomenon: people’s demand-driven decisions. I suggest focusing on local areas to gain a better understanding of trends. Interestingly, during the pandemic year leading up to September 2021, while rents in inner London fell by about 7%, the most significant rental increases were observed in towns like Rochdale, Altrincham, Folkestone, and Farnham. These places, with their heritage and regeneration potential, saw substantial growth. Qualitative differences between specific places and property types will likely continue to be pronounced.

Don’t forget that “average house prices or falls” relate to the whole of UK areas they include, and that local areas or regions may be very different. Your own area figures may be substantially different from those averages.

In summary, the future of property value growth is intricate and challenging to predict, but it will manifest in people’s experiences when buying real estate.

Source: Insights and data for this article have been provided by Yolande Barnes as published in Propertychronicle.com.

Les Long FRICS FISVA Principal, Eyesurvey

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