Falling house prices won’t open new doors – for buyers or renters

The revival of UK house prices since the peak of the pandemic has now halted, with sale prices falling in April according to the Nationwide Building Society index, and rising only 0.1% on the Halifax index. While completed sale prices are still around 1% higher than a year ago, they appear to be levelling off at 4% below their previous mid-2022 peak.

But this won’t be much help for the many who are still struggling to fund their first home purchase. A Nationwide survey found that 49% of would-be first-time buyers have had to delay their plans either due to the high cost of homes or the loans they need to afford one.

In 2023, the median house price in England was 8.3 times the median annual earnings there. Although down from the record of 9.1 times earnings set in 2021, this compares with 6.9 in 2010 and just 4.2 in 2000. House prices are a smaller multiple of average earnings in Scotland, Wales and Northern Ireland, but their increases since the millennium have been comparably strong.

This “affordability ratio” is substantially worse across much of south-east England. In London, it’s 8.5 even in the lowest-cost borough, Tower Hamlets, rising to 20 in Westminster and over 30 in Kensington and Chelsea. And that’s despite this ratio using medians, the wage and house price in the middle of the distribution, to avoid distortions from very expensive properties and high incomes.

Affordability has dropped because the average house price has raced ahead of general consumer prices, while average earnings have not kept pace – in 2023, they were still 8% below their 2008 level in real terms. The reason for this drop in affordability is mainly that demand for housing has risen faster than supply in the places where most people want to live and work.

The UK needs to bring around 300,000 new homes on stream each year to accommodate a population that has grown by more than 4 million (to 67.6 million) since 2011, as well as rehousing more than 2.5 million people stuck in substandard accommodation. But this target has not been achieved since 1973-74.

UK new dwelling completions have averaged 157,000 each year since 2010. And the number of empty homes remains stubbornly above 1 million.

Affordability also depends on the cost and availability of mortgages. When house prices fall, it’s usually against a worsening economic backdrop that also features rising mortgage interest rates and tightening eligibility criteria. That’s the case now, with several big lenders raising their longer-term rates in April, passing on the steep rise in Bank of England base rates since the start of 2022. As asking prices start to fall, so is the affordability of the loans that most buyers still need in order to meet them.

Rents rising

Renting is the main alternative to buying, and the price of a house is, in principle, related to the rent it would yield if the owner let it out. But that link has recently been broken, with average rents continuing to rise strongly through 2023-24 when the sale price rise tailed off.

This is mainly due to a fall in the availability of homes for long-term rent. Some former landlords have withdrawn from the market due to tighter regulation (designed to protect tenants) and tax treatment. Others have found they can get more revenue from short lets, made easier by online booking services.

Decades of above-inflation house price increases, and unusually low mortgage rates from 2009-22, have significantly boosted the wealth of households who bought property in the 1980s and ’90s, and paid off their mortgages while interest rates were low. Many can now hand this wealth down in gifts or transferred properties, helping their children and grandchildren reach the elevated housing ladder. The “bank of mum and dad” transfers around £17 billion per year, more than half of it via housing.

But this process remains deeply unequal, as it’s a solution denied to those whose parents were unable to become owner-occupiers or had to spend their housing wealth meeting other costs.

Although all political parties express concern about high housing costs, they are wary of a price drop that would significantly dent the wealth of owner-occupiers, who are still a majority in most parts of the UK. The scale of private investment in housing means that a sustained price fall would do wider damage to the economy, through its effect on consumer confidence and household balance sheets.

The prospect of ongoing price falls and more expensive loans is likely to make households more cautious on spending, even if they avoid negative equity (where the house price sinks below the outstanding mortgage). The corresponding shrinkage of bank and building society assets would constrain their new lending, further dampening investment and consumer demand.

The desire to prevent significant house-price falls has slanted successive governments’ policies towards helping buyers to pay more, rather than supporting developers to build more. House builders blame planning restrictions for slowing their work, but new developments are increasingly held back by flood-risk concerns as well as local opposition.

Affordable housing availability has not yet recovered from the widespread sale of council housing in the 1980s and ’90s, which turned one generation of tenants into owner-occupiers but left less affordable rental space for the next.

Budget constraints on local authorities have prevented them from replacing all the sold-off council houses, forcing central government to spend more on supporting families to pay higher private rents. The current backlog of council home repairs in Hackney, the English council with the highest proportion of social renters, highlights the next government’s twin housing tasks: repairing the homes it provides directly, while bringing private-sector alternatives back within people’s reach.

Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.