It might seem that house price inflation is endemic to the UK. But a look at the recent data casts some doubt on the proposition.

Even for the UK as a whole, where moves out of London during lockdown and accommodative monetary policy have boosted house prices in the country, house prices have risen by 28.5% in the five and a half years since the Brexit vote in mid-2016. This compares with inflation which hasn’t been far behind. Average earnings over the same period were up 20.6% and the Consumer Price Index (CPI) up 14.4%. Deflated by the CPI, the annual real increase in house prices has been 2.1%.

In London, where high house prices are meant to hit hardest, the rise since mid-2016 has been even lower – only 11.4%. This is well below both price and earnings inflation.

It is only in the past year, where excessively loose monetary policy has boosted asset prices, that house prices even in London have decisively risen faster than inflation. In the 12 months to February UK house prices are up 10.9%, London prices 8.0%, against consumer price inflation of 5.4% (though rising) over the same period.

The factor that has done much more than any to boost house prices is cheap mortgages. A five-year fixed rate mortgage cost 6.4% in June 2008 before the financial crisis, 2.54% in June 2016 after the Brexit vote and 1.79% in February this year. Indeed, in September 2021 when house price inflation was especially strong, the rate had fallen as low as 1.29%.

It is ironic that discussion about house prices generally is based on their unaffordability and yet what has actually caused the recent rise in prices is the increasing affordability of servicing a mortgage as a result of monetary loosening.

And yet those who point to the unaffordability of housing have a point. For those already on the housing ladder or with parental cash to spare (the Bank of Mum and Dad, BOMAD, a concept which Cebr invented, at least partly finances 56% of all first-time buyers), the cost of housing is mainly the repayment cost of the mortgage.

But for those trying to get on to the housing ladder without parental support, the main impediment is the deposit. It is hard to get a mortgage of more than 90% of the value of a property so the final 10% has to be found from savings – and this can be hard to do on modest salaries, especially when faced with high London rents.

But even the recent rise in UK house prices will be hard to sustain in the near future. Over the next two years home buyers are likely to face the headwinds of higher mortgage rates[1], squeezed living standards from higher inflation, probably rising unemployment, and higher taxes from the failure to index tax allowances and bands and from the national insurance contribution rise. On top of this, the stamp duty holiday which rekindled the housing market in 2020, came to an end in September 2021 and this will have a hangover effect.

Most analysts decry the UK’s low rate of housing starts. Yet the recent record is less bad than might appear. Housing starts in England in 2021 were 175,000, roughly the same as the previous peaks in 2019 and 2007 and slightly higher than the projected rate of household formation of 160,000 a year.

It is hard to believe that the economy can surmount its current woes of excess inflation leading to squeezed living standards without quite a slowdown or possibly a recession. This will surely affect house prices. Accordingly, Cebr’s latest forecasts shows a marked slowdown in annual price growth for properties from an estimated 8.7% in Q1 2022 to a low of -3.9% in Q2 2023.

But be careful what you wish for. For most people, the pains caused by recession are even greater than those caused by high house prices.

^{_{[1] Recent Bank of England data show that the average 5-year mortgage rate rose to 2.12% in March, following the largest monthly jump in rates since 2009 and reaching the highest level since March 2017.}}

For more information please contact:

Douglas McWilliams, Deputy Chairman Email dmcwilliams@cebr.com Phone 07710 083652

Kay Daniel Neufeld, Head of Forecasting and Thought Leadership Email kneufeld@cebr.com Phone 020 7324 2841

Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.