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What has happened? UK house prices have fallen by 11% in real terms (adjusted for inflation) in just one year, revealing the true extent of the property market downturn, Bloomberg Economics calculations show.
Details. In cash terms, prices recorded by Nationwide Building Society have fallen by less than 5% since their peak in September 2022. However, taking into account inflation, the drop is more than twice as large.
The results show how the fastest inflation in decades has eroded the value of housing wealth. In real terms, house prices are no higher than they were at the end of 2015, and Bloomberg Economics says they are set to fall further.
Quote. “Britain still has a worse inflation problem than the US and the eurozone,” said European economist Niraj Shah.
“Britain still has a bigger inflation problem than the US and euro-area,” said European economist Niraj Shah. “Meanwhile, elevated interest rates will continue to bite into the budgets of homebuyers, limiting their purchasing power.”
The situation. While much of the housing market downturn following the 2008-09 financial crisis was driven by falling in cash terms, this time the adjustment has largely been driven by inflation. The fall in real terms is still less than the 22% decline from the October 2007 peak.
Activity in the housing market has been hit by the sharp rise in mortgage rates since the Bank of England began raising interest rates at the end of 2021.
Forecasts. Duncan Paxman, senior director of European structured finance at Fitch Ratings, predicted a 15% peak-to-trough fall in house prices in real terms, with "much of the adjustment coming from inflation."
Quote. “Wage growth of about 8% year-on-year in August 2023 has offset some deterioration in affordability,” he said. “We anticipate interest-rate reductions from the second half of 2024 through 2025, which will improve affordability despite coinciding with a slowdown in wage growth.”
Source: BNN Bloomberg
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