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Inflation has masked the true extent of recent falls in UK house prices, with many regions and nations of the UK no better off in real terms housing wealth than on the eve of the 2008 financial crisis, research has found.
UK house prices have fallen by a modest 2.8 per cent in nominal terms since their peak in March 2022, but 13.4 per cent in real terms, according to analysis of the Nationwide house price index by estate agent Savills. After adjusting for inflation, average real house prices are no higher than they were in late 2015, Savills said.
“Because of high inflation, the adjustment in the average price of a UK home has been much more significant in real terms,” said Lucian Cook, residential research director at Savills. The analysis suggests the average buyer will have seen a real-terms loss in the value of their home if they bought after December 2015.
Across some regions and nations of the UK, house prices have yet to recover to 2007 levels after adjusting for inflation. Prices in north-west England, Yorkshire and the Humber and West Midlands, as well as Wales, Scotland and Northern Ireland, are substantially below their peak before the 2008-09 financial crisis, Savills found.
Real-terms prices in the north of England have fallen by 27 per cent since their peak in the third quarter of 2007. Over the same period, Yorkshire and the Humber is 21 per cent down; the East Midlands by 11 per cent; and Wales by 18 per cent.
Cook said property owners may not have felt the loss of value since the nominal value of their homes may have gone up or not fallen significantly in the past few years, but inflation had done its work of eroding underlying value, leading to the adjustment in real terms. To find the last time house price growth exceeded inflation over any sustained period one had to go back to the period between the mid-1990s and 2007, he added.
UK consumer price inflation — excluding housing — was running above 10 per cent in the seven months from September 2022 to March 2023. It has since fallen to 6.7 per cent in the year to August, but remains elevated.
Higher inflation has led the Bank of England to raise its official rate of interest from 0.1 per cent to 5.25 per cent since December 2021 and pushed up mortgage rates, damping demand in the housing market.
While lenders have competed more vigorously on mortgage rates in recent weeks, prompting a decline in fixed rates, the average five-year fix is at 5.93 per cent, compared with 2.55 per cent in October 2021, according to data provider Moneyfacts.
Rachel Springall, finance expert at Moneyfacts, said the average two- and five-year fixed rates had fallen for the second month running, offering borrowers potentially cheaper deals. “These are encouraging signs for borrowers who may be looking for a new fixed-rate deal, but they still may be on the fence about locking in, hoping rates will fall further in the weeks to come.”
A “gradual normalisation” of Bank of England interest rates, which Cook expected to take place from next year, would ease pressures on mortgage affordability, he said. But it remained hard to see the market emerge into a new period of “inflation-plus” house price growth.
“That raises the question of whether that golden age of asset price inflation, well above the underlying rates of inflation, has passed. When will it return? The answer will greatly depend upon what happens to interest rates from here.”