Taking a closer look at falling house prices

This article was originally written for my column in the Evening Standard. 

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It’s official: UK house prices have fallen for the first time in 15 months. According to the new House Price index by Nationwide, in October the cost of a house fell from an average of £272,259 in September to £268,282, the first drop since July 2021 and the biggest decrease since June 2020.

With mortgage rates up, affordability tests tightening and commentators acknowledging that house prices are likely to fall further next year, is 2023 the year first-time buyers have been waiting for?

The truth is that house prices have been falling for months, and to understand why you need to look much more closely at the data.

House prices have always been particularly difficult to interpret because human nature plays a nasty trick on us. We are often inclined to trust those sources that reinforce our preferences or existing beliefs. So those who have recently purchased will pounce on news that reassures them they’ve not just made an expensive mistake. Meanwhile, those seeking to get onto the ladder will be eager for stories about falling prices.

To see the challenge, compare two of the leading indices: Rightmove and the UK HPI. Both report that London prices have risen – the former by 8.3%, the latter by 6.9%. And yet real prices are actually falling. What’s going on?

The first thing to understand is why the indices differ. One factor is that Rightmove looks at advertised prices. At times when the market may be slipping, however, asking prices may be higher than clearing prices, which overstates the numbers. HPI, on the other hand, published by the UK government, looks at the actual price paid. But to get that data, the index must wait until sales details are filed with the Land Registry – a process that takes well over a month after the conveyancing process.

Add to this different calculation methods. Rightmove uses an arithmetic mean as opposed to the UK HPI which uses a geometric mean (and a different weighting methodology). As a result, Rightmove thinks the average London property is nearly £150k higher than the government measure – probably reflecting their incentive to ‘pump up’ the market a bit more.

But the real challenge is that even the most reliable index looks at changes in nominal terms.  High CPIH (the inflation rate which takes account of housing costs) means that house prices currently actually have to increase by at least 8.8% per year in order that the value of property remains constant in real terms.

With inflation factored in, by almost any measure London house prices are already falling.

Unfortunately, most commentators are predicting that it’s going to get worse in 2023. Lloyds is forecasting a 9% fall, Capital Economics a 12% fall, while Credit Suisse predicts a 15% fall. Time will tell. But sadly, those are all falls in nominal terms again, which means that if CPIH remains at its current level (and some think it may rise significantly in 2023 as domestic energy unit prices will no longer be capped by the government after April), house prices could fall in real terms by as much as 30%.

While many in the market are keen to reassure potential buyers that a serious crash is unlikely, there are good reasons to be less sanguine–particularly if you haven’t yet taken the plunge. High mortgage costs could lead to defaults or distressed selling, and even small volumes of urgent selling in a market can push prices down very sharply. 2023 could be an exceptional year to get smart about property auctions for just that reason. And then there’s that tidy exemption on SDLT for first time buyers up to £425k which has survived the mini-budget U-turn.

But before you put that champagne on ice, first timers, note well: the deposit you have carefully saved for the downpayment on your dream starter home is currently earning less than 2% in a savings account, yet consumer price inflation exceeds 10%. So while house prices may well fall, so too is your relative purchasing power. Oh, and interest rates are far from their forecast peak, so mortgage rates are likely to rise before they fall again.

With all that ahead of you, perhaps it is time to open a bottle after all – but it may need to be something a lot stronger than champagne to steady the nerves for the months to come.