Inflation has soared to a new 40-year high of 9.4pc in June – and this brings a dangerous triple whammy for house prices.
Plunging real wages are hitting buyers and homeowners’ pockets just as high inflation pushes the Bank of England to raise interest rates, which when combined, has drastically reduced people’s ability to afford a mortgage. The fewer people can take out a loan, the fewer there are to buy homes.
High inflation has depressed consumer spending, meaning a recession is looming – in turn bringing a risk of rising unemployment. This triggers mortgage defaults and forces people to sell their homes, normally for less than they are worth.
The housing market slowdown has already begun. New buyer inquiries in June fell at the fastest rate recorded since 2020, when housing market shutdown, according to the Royal Institution of Chartered Surveyors, a professional body.
Inflation is steadily destroying people’s earnings. In real terms, wages have been falling since November 2021 and are now plunging at the fastest rate since records began.
From March to May, regular pay climbed by 4.3pc year-on-year, according to the Office for National Statistics. When adjusted for inflation, however, wages actually dropped 2.8pc.
By comparison, in the wake of the financial crisis in 2008, real regular pay only fell by 1.1pc and house prices later fell by 17.6pc.
A larger, 2.4pc drop in real pay came later in 2011 and a 10-month period of house price falls followed.
Falling real wages matter for the housing market because they squeeze affordability. First-time buyers find it harder to save for deposits. Homeowners find it harder to cover their mortgage costs.
Tax rises and energy bill increases accentuate the blow. According to fund shop Hargreaves Lansdown, real disposable income will fall even further, dropping 3pc in the three months to July.
The crunch is only going to get worse. Sam Miley, of the Centre for Economics and Business Research, an analyst, said: “This downward pressure on real pay is set to continue.”
It is an economic Catch-22. If employers raise wages to help boost workers’ spending power, there is a risk of an “inflationary spiral”, said Mr Miley. This could bring greater financial pressure for households long-term and even higher interest rates.
The CEBR expects a lower peak in unemployment of 4.5pc in the middle of 2023, but this will still cast a shadow over the housing market.
Karl Thompson, of CEBR, said: “This forecasted uptick in unemployment is likely to reduce average household earnings, with negative knock-on implications for housing market demand and prices.”
Economic instability will also spook lenders, who are likely to reduce mortgage availability.