UK house prices slump 11% when taking inflation into account
UK HOUSE prices have plunged by 11 per cent in real terms in just over a year, revealing the true extent of the downturn in the property market, calculations by Bloomberg Economics show.
In cash terms, prices recorded by Nationwide Building Society have fallen by less than 5 per cent since they peaked in September 2022. The hit is more than twice as large when inflation is taken into account, however.
The findings show how the fastest inflation in decades has eroded the value of housing wealth. In real terms, house prices are no higher than in late 2015, and Bloomberg Economics says they have further to fall.
“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.”
While much of the housing downturn following the 2008-09 financial crisis was driven by prices falling in cash terms, this time the adjustment has largely been driven through inflation. The real-term drop is still smaller than the 22 per cent decline from a peak in October 2007.
Activity in the housing market has been hit by the sharp rise in mortgage rates since the Bank of England started raising interest rates in late 2021. Borrowing costs have eased in recent months amid speculation the central bank will turn to easing policy next year to support the economy.
Duncan Paxman, senior director of European structured finance at Fitch Ratings, predicted a 15 per cent peak-to-trough plunge in house prices in real terms with “most of the adjustment coming through inflation.”
“Wage growth of about 8 per cent 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.” BLOOMBERG
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