The Property Market Is Booming Again As Inflation Nears Double-Digits, So What Next For House Prices?

House prices are booming again if you look at the major property reports. Nationwide and Halifax have seen a surge in annual inflation in recent months and the lagging Land Registry and ONS indices also show prices picking up.

London and the South East are driving prices much higher and skewing these headline figures, but prices are now rising in many reports across the country.

But set against that sellers outside of the most popular areas still say the market is tough. So what will happen next?

The latest house price news, predictions and market reports are analysed by This is Money’s property expert Simon Lambert.

Soaring: House prices have leapt nearly 9 per cent in the last year.

Soaring: House prices have leapt nearly 9 per cent in the last year.

The property market snapshot

Average house prices have surged by £14,000, or 8.8 per cent in a single year, rising at their fastest pace since 2010 the latest Nationwide house price index has revealed.

It found average property values rose 0.7 per cent month on month to reach £176,491, the highest average price since April 2008.

January also marked the 13th consecutive monthly rise in property values reflecting a rebound in consumer confidence, the building society said. Average property values have also risen by no less than 0.7 per cent each month since last July.

It came as the Land Registry reported house prices in England and Wales rose 1.1 per cent in December compared with a month earlier, which pushed the annual increase up to 4.4 per cent from 3.3 per cent in November.

House prices in London spiked up 2.6 per cent in the month and were 11.2 per cent higher than a year earlier in what the Land Registry called and uplift that was ‘considerably highers than other regions’. The price of the average property in the capital now stands at around £403,792.

Recent research by This is Money highlighted how the resurgence in house prices set against stagnant wages is pushing homes further out of reach. we plotted average house price inflation against wage inflation to illustrate the disturbing decade-long trend of property prices rising considerably above earnings.

House prices are currently rising by 5.4 per cent a year, whereas at the same time wages are rising 0.9 per cent.  So the cost of buying the average home is going up six times as fast as earnings.

To put that into context a home buyer needs to find £16,000 more than a year ago, but wages have only risen by £261.

Average UK house price inflation is being pulled up by London and the South East – knock them out of the equation and prices are rising more gently, by 3.1 per cent annually.

Yet, that still means they are going up almost three-and-half times as fast as wages.

What does the future hold for UK house prices? This map from Savills shows their predicted trends over the next five years. View the full version here.

Estate agent Savills has issued its prediction for house prices for the next five years.

It sees house prices rising by 25 per cent over five years across Britain, but adds that some areas will outstrip that and London, which is also tipped to rise 25 per cent, over this period. The South East and East of England are expected to rise by 31 per cent, while the West will rise 29 per cent. Prices will rise close to the average in the Midlands and at about 20 per cent across the North, Wales and Scotland.

For prime property, it says prices will be up by about 25 per cent across London and the commuter belt, with a rise of 21 per cent in England below the North South divide and 18 per cent above that and in Wales and Scotland.

It has detailed its forecasts in the interactive map above, which can be moved between prime and mainstream markets The Savills map defaults to prime prices, click on mainstream markets to see the wider picture, then use the year buttons at the bottom.

Finer details: How Savills expects house prices to play out in the mainstream market

Finer details: How Savills expects house prices to play out in the mainstream market


The Land Registry monthly report excludes a sizeable chunk of the property market. New build home sales are not included and neither are properties that have previously been in long-term ownership.

Due to its repeat sales formula, the Land Registry monthly index does not include any property that has not sold at least twice since 1995.

Quarterly figures that include all transactions show prices up by 6.84 per cent in the year to June to stand at an average £242,415. Monthly figures for the same period show prices up 0.6 per cent annually at an average of £162,169.

House prices for first-time buyers are rising seven times as fast as average wages, official figures revealed today, with new homeowners spending £14,000 more than a year ago.

Homebuyers are being forced to stretch themselves further, the ONS data showed, as prices pick up in a resurgent property market fuelled by Government support schemes.

House price inflation for first-time buyers hit 6.4 per cent in November, as it continued to outpace the 0.9 per cent rise in average wages recorded in the most recent ONS figures.

The dramatic turnaround in the property market’s fortune means the average first-time buyer is now paying £187,000 compared to £173,000 a year earlier.

Home movers are paying an average of £284,000, the ONS house price index said, which amounts to £18,000 more than a year earlier.

Fears of a new property bubble being inflated have been stoked by rising prices set against a backdrop of low interest rates, cheap money being pumped through banks to homeowners by Funding for Lending and the Government’s deposit-boosting Help to Buy schemes.

The main driver behind the bounce back over the past year has been mortgage rates falling, banks and building societies loosening lending criteria and some confidence returning to the market.

The first part of the Help to Buy scheme, which boosts deposits for new build purchases, seems not to be driving prices substantially higher, with the average cost of a new home rising by just 2 per cent annually compared to a 5.7 per cent increase in existing properties.

Affordability worries: House prices relative to average earnings are rising to levels not seen since 2008 creating concerns that mortgage borrowers could start to overstretch their finances

Affordability worries: House prices relative to average earnings are rising to levels not seen since 2008 creating concerns that mortgage borrowers could start to overstretch their finances

Are these really signs of a new bubble?

But is this really painting the picture of a boom?

One flaw in the bubble case is that property transaction figures are also released by the Land Registry and show that while the market may be picking up, sales are still far below pre-crash levels.

They have a long way to go to get anywhere near long-term average levels.

Of course, they may not get back there and house prices could still continue to rise too fast.

The other point to highlight is that while there can be little doubt that much of London and the South East are sat firmly in bubble territory, much of the rest of Britain’s heavily localised property markets remain depressed.

Snapshot: The Land Registry table details what is happening to prices across England and Wales.

Snapshot: The Land Registry table details what is happening to prices across England and Wales.

Are rising house prices a good thing?

The property market has become the cornerstone of the British economy, so in the short-term rising prices spell good news.

Property in London and the popular commuter belt has been on full steam ahead for some time after recovering from the post credit crunch slump, but much of the rest of the country has been stuck in the doldrums.

With wages stagnant and many stuck with low levels of equity or in negative equity, this has left people unable to move and sapped confidence.Those who have been stuck in this position will welcome a pick-up in prices.

In the short term a revival is good for the economy. People moving home tend to spend money, on anything from new household goods to solicitors fees, and rising house prices generally equate to greater confidence.

Looked at over the longer term, however, a return to above inflation property price rises is likely to cause the economy more problems. Prices are still historically high compared to wages and homes are only affordable due to record low mortgage rates, which one day must rise.

The props under the market from Funding for Lending to Help to Buy have a common aim, making expensive property more affordable through easier credit. Arguably it would be better if property became more affordable due to wages rising in relation to house prices and without a substantial increase in earnings this can only happen if property values don’t shoot up.

While much of the property industry has welcomed the return to rising house prices, critics suggest another property bubble is risked by the addition of the Government’s Help to Buy schemes to the cheap mortgage cash pushed by the Bank of England’s Funding for Lending scheme.

And even if much of the country’s moribund local property markets feel at little risk of being hit by a new bubble, the overheated London and South East markets could come crashing down and take the rest of the economy out with them.

Best and Worst: It will cost you the most to buy a home in Chichester, while buying in Belfast gets you more for your money

Best and Worst: It will cost you the most to buy a home in Chichester, while buying in Belfast gets you more for your money, says job and property listing site Adzuna.

Help to Buy: what’s this all about?

Help to Buy takes aim at tackling a short-term issue in the property market, lenders’ demanding large deposits for decent mortgage rates and in its first round offered to bump up a 5 per cent deposit to 25 per cent on a new-build home through a five-year interest-free loan.

The second part provides mortgage lenders with a guarantee that protects them if they take on borrowers with a 5 per cent deposit, essentially underwriting any losses up to 20 per cent.

Helping more people who want to buy a hope is a noble idea, but the real problem with our Britain’s property market is that homes are too expensive.

The cold hard truth is that for our economy to function properly either house prices need to fall or wages need to go up to. Help to Buy eases the symptoms but does not tackle the cause and arguably makes the situation worse not better.

The difficult part of the Help to Buy argument is that from the side of the hopeful first-time buyers and movers taking the cash it can look a short-term no-brainer.

The way Britain’s property market game is run means it’s a big risk to sit on the sidelines. You may believe interest rates are too low, but if you are a homeowner it would be foolish not to take advantage of them to cut your mortgage payments.

Likewise, it’s hardly surprising there has been a steady supply of people willing to take some interest-free government money to get out of their rented home or climb up another rung of the property ladder, when the alternative is to stay put, save hard and hope property prices fall and wages rise.

The headwinds facing the market

The big potential stumbling blocks for the property market.

  • Interest-only mortgage crackdown
  • High property costs
  • Austerity measures and the eurozone crisis

Lenders have made it much tougher to take out cheap interest-only loans, which had helped prop up the property market. A squeeze on interest-only has been in place since the financial crisis hit but has dramatically stepped up a gear last year.

The effects of this should not be underestimated.

Those with existing interest-only mortgages are finding their lenders will not let them borrow more to move unless they switch to a repayment loan which comes with much higher monthly payments, this is a reduction in credit and will exert downward pressure on prices. 

The second problem is that banks and building societies are not out of the woods yet.

It may have gone quiet for the moment but the threat of crisis weighs heavily on the banking sector – if things get worse again banks could still find their balance sheets hammered.

Government cuts filtering through, as the UK tries to balance the books, mean public sector job losses, higher taxes and a dip in confidence.

The cost of moving is also sky-high. Those buying family homes in areas where a relatively modest property of this kind costs more than £250,000 face a stamp duty bill of at least £7,500, add estate agent and solicitors’ fees and moving can set a normal family back £15,000 or more, without even having to find the extra cash for a 25% deposit on a more expensive home.

Should you buy a home?

The flipside to fragile confidence is that mortgages continue to get slightly easier to secure and borrowed money at the moment is cheap by historic standards.

So if you can get a good deal and a good rate, now is a good time to buy provided you accept prices may fall again in the short term.

So should you buy? The answer should be based on how long you plan to own the property (whether as a home or investment), whether it personally suits you and most importantly whether you can afford it.

Buyers preparing to take the plunge should bear these factors in mind and ensure they can take the hit of future interest rate rises and a fall in house prices.

Confidence may return and the property market continue to rise from here, but if things take a turn for the worst it is also not unrealistic to see prices falling by 10% over the next year or two.

Caveat emptor (buyer beware) and make sure you’d be happy in your new home, because you could be stuck there in five years’ time.

House price history – what you need to know

Anatomy of a house price slump: how it happened

The party finally came to a sticky end for UK property prices in 2008. After a decade long boom, the market peaked in late summer / autumn 2007, and then prices tumbled as banks beat a hasty retreat from easy lending.

House price falls accelerated through 2008 and property market activity hit record lows in late 2008 and early 2009.

The property market’s performance in 2008 was worse than almost all of the gloomiest predictions made for the year.

Of the major reports, the gloomiest picture was painted by the Halifax. Its index showed the average property losing a greater percentage of its value in just 12 months than during the whole peak to trough period of the 1990s crash.

In December 2007, the Halifax index said the average home was worth £197,074, a year later this had fallen to £159,896 ‘ a drop of 18.9 per cent. At the peak before the 1990s crash, Halifax’s figures show the average home was worth £70,247, in May 1989. Six years later, property prices bottomed out, in July 1995, at £60,965. This was a peak to trough loss of 13.2 per cent, although it was much larger in real terms.

The Land Registry’s report showed property prices falling by 13.5 per cent over the year, with the average home in England and Wales worth £158,946 ‘ a similar value to October 2005. Even in the supposedly robust London market, the average home lost 12.9 per cent, or £45,585, to end 2008 worth £307,071 ‘ a similar value to November/December 2006.

How the property market was hammered?

While property price statistics for 2008 and early 2009 painted a fairly bleak picture, they did not fully reflect the devastation wreaked so rapidly.

In a little over a year, a booming property market became desolate, with the Royal Institution of Chartered Surveyors reporting its agents selling less than one property per week of the year.

A perfect storm hit the UK property market in 2008. With property prices having risen by 200% in the ten years to December 2007, according to the Land Registry, property was in a bubble.

Many economists had predicted that this bubble was ripe for bursting, but after showing signs of a slowdown in 2005, the market sped up again and the average price peaked between August 2007 (Halifax: £199,612) and January 2008 (Land Registry: £184,784).

The pin that burst the bubble was the credit crunch. The sub-prime crisis that had been brewing in the United States erupted in the summer of 2007, and as the year continued, the residential mortgage-backed securities market that had driven massive growth in credit for homeloans essentially ceased to exist.

These allowed lenders to sell packaged residential mortgages to a special purpose vehicle, which then issued debt to investors, lured by strong returns from a supposedly liquid and low risk investment.

According to the interim report by Sir James Crosby, commissioned by the Treasury, between 2000 and 2007, the total amount outstanding of UK residential mortgage backed securities and covered bonds rose from £13bn to £257bn. The report said that by 2006 mortgage-backed security funding accounted for two-thirds of new net mortgage lending in the UK.

In July 2007 this market came to an ‘abrupt halt’, according to Crosby. This brought about the collapse of Northern Rock in the UK, problems for banks such as Bradford & Bingley that had fuelled the buy-to-let boom and major issues for all mortgage players. In February 2008, Northern Rock was nationalised and American bank Bear Stearns, which had specialised in the fancy finance that fuelled the mortgage boom, collapsed. It was the final sign that the party was over.

Banks fearful of huge losses began to dramatically cut back on mortgage lending and a vicious circle began. The more banks cut back on lending and raised deposits, the fewer homebuyers could secure finance, the more property prices fell and banks became more fearful and cut back further on lending.

The mortgage crunch and property prices

Mortgages are the key to the property market. The vast majority of buyers cannot purchase a property without a homeloan and the price, availability and restrictions imposed on these have the biggest impact on their ability to buy a home.

The dramatic slump in property prices in 2008 and early 2009 came as lenders turned off the mortgage taps. Lenders suffered a lack of funding, with the mortgage backed securities market that accounted for two thirds of new lending suddenly seizing up. Meanwhile, banks were also hit by a crisis of confidence, as they looked over the Atlantic and saw the devastation wreaked in America heading for the UK.

Mortgage rates rose, deposits were hiked and reports abounded of lenders pulling mortgages at the eleventh hour. Mortgages for home purchases dived by 49 per cent in 2008, to just 516,000, according to the Council of Mortgage Lenders. This was the smallest number since 1974 and represented a third less than the 723,000 approved in 1991 ‘ the lowest level of the 1990s slump.

The Bank of England’s monthly figures have also shown mortgage activity drying up. The number of mortgages for homebuyers hit a record low of 27,000 in November 2008.

In September 2007, just before the downward spiral began Bank of England figures showed mortgage approvals for homebuyers of 102,000 ‘ significant at that time as this was the lowest level for two years.

Nationwide house prices vs mortgage approvals graph

Inflation and paying off your home

One of the effects of the rapid inflation in property prices since the early 1980s is that it paid off a generation’s mortgages.

Those who bought a home in the 1980s to early 1990s, and then held on through double-digit interest rates and the 1990s crash, have emerged with properties that have risen to be worth five to ten times their mortgage.

The average UK property cost £30,898 in 1983, according to Halifax, and £198,500 in September 2007 ‘ an increase of 542 per cent. Even allowing for the current slump that property was worth £160,327 in February 2009, an increase of 419%. For a similar effect to be delivered to a modern day homebuyer, the cost of the average property would need to stand at £832,097 in 2035.

In 1983 the average wage according to the Office of National Statistics was £7,700, today the most comparable measure stands at £24,900, an increase of 223 per cent. If both property and salary inflation are sustained at the same long-term rate, the average wage by 2031 will be £80,500 and the home will cost 10.3 times more.

This compares to the average home costing four times the average wage in 1983 and 8.5 times the average wage (£23,300) at the peak of the Halifax index in August 2007.

The big problem is that since 2000 wages have not risen anywhere near as fast as property prices or general prices in the economy, and since recession struck they have barely risen at all while inflation has returned with a vengeance.

The idea that inflation pays off individuals’ debts really only helps people if their wages rise in line with prices – otherwise inflation is just making them poorer.

The positive side – demand and supply and property prices?

Pessimists would have you believe that property in the UK is doomed, but this ignores the fact that housing is not stocks and shares.

Owning a home is an emotional desire, a must-have aspiration for most Britons, and the demand for property in Britain remains high. Prices may have fallen by 20%, but many potential buyers see this as a good purchasing opportunity.

The shortage of supply of property in the UK compared to demand has arguably been exaggerated by developers and the Government, but decent sized family homes in popular areas are typically in short supply.

Government development targets and planning guidelines have focused on quantity rather than quality. Target-led development has encouraged major scheme developers to concentrate on flats and small properties in order to deliver the most homes at the cheapest price.

A report by the National Housing and Planning Advice Unit the government’s independent housing experts said that an undersupply of larger homes pushes up the cost of all properties and exacerbates house price inflation problems.

House price crash: Not everyone is upset

While falling property prices has brought tough times for those who have seen equity slashed, fallen into negative equity or even had their homes repossessed, there are others who are pleased that prices are falling.

Lower property prices are a boon to first-time buyers and those moving up the property ladder, but only if they can raise the substantial deposit needed to take advantage.

The UK’s high house prices are a drag on its economy, they hamper movement, encourage boom and bust and leave it vulnerable to shocks. Narrowing the gap between property prices and wages and making buying a home less of a gamble, would be a good thing.

Source: This Is Money
Food for thought: While many will start “chasing” properties when the excitement begins and prices start to move upwards, it is important to fall back on fundamentals. Invest in your Financial Education and follow the set criteria to avoid falling into the trap of listening to noises. Awesome! :)
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