According to the Halifax house price index, house prices fell in the UK in the three months to April. This is the first quarterly fall since 2012. The Nationwide index (see below), shows that prices in April were 0.4% lower than in March (although the 3-month rate was still slightly positive).
The fall in house prices reflects a cooling in demand. This, in turn, reflects a squeeze on household incomes as price rises begin to overtake wage rises. It also reflects buyers becoming more cautious given the uncertainty over the nature of the Brexit deal and its effects on the economy and people’s incomes.
The fall in demand is also driven by recent Bank of England rules which require mortgage lenders to limit the proportion of mortgages with a mortgage/income ratio of 4.5 or above to no more than 15% of their new mortgages. It is also affected by a rise in stamp duty, especially on buy-to-let properties.
Despite the fall in prices, this may understate the fall in demand relative to supply. House price movements often lag behind changes in demand and supply as people are reluctant to adjust to equilibrium prices. In the case of a falling market, sellers may be unwilling to sell at the lower equilibrium price, believing that a lower price ‘undervalues’ their property. Indeed, they may not even put their houses on the market. This makes prices ‘sticky’ downwards. The result is a fall in sales.
Eventually, such people will reluctantly be prepared to accept a lower price and prices will thus fall more. Once people come to expect price falls, supply may increase further as vendors seek to sell before the price falls even more. So we could well see further falls over the coming months.
Lower house prices and falling sales is a picture repeated in many parts of the UK. It is particularly marked in central London. There, estate agents have begun to offer free gifts to purchasers. As The Guardian puts it:
London estate agents have begun to offer free cars worth £18,000, stamp duty subsidies of £150,000, plus free iPads and Sonos sound systems to kickstart sales in the capital’s increasingly moribund property market. The once super-hot central London market has turned into a ‘burnt-out core’ according to buying agents Garrington Property Finders, prompting developers to offer ever greater incentives to lure buyers.
… Land Registry figures show that in the heart of the city’s financial district, average property prices plummeted from £861,000 at the time of the EU referendum to £773,000 in February, a decline of 15%, although in London’s outer boroughs prices are still up over the year.
But lower property prices are good news for first-time buyers, although some of the biggest falls have been in the top end of the market.
The fall in property prices may continue for a few months. But population is rising, and with it the number of people who would like to buy their own home. Once real incomes begin to rise again, therefore, demand is likely to resume rising faster than supply. When it does, house prices will continue their upward trend.
Articles
UK house prices in first quarterly fall since 2012 BBC News (8/5/17)
UK house prices fall again in April as buyers feel the pinch The Guardian, Angela Monaghan (28/4/17)
Buy a home, get a car free: offers galore as London estate agents struggle to sell The Guardian, Patrick Collinson (3/5/17)
London is now one of the five cities with the lowest house price growth in the UK City A.M., Helen Cahill (28/4/17)
London Housing Market Property Bubble Vulnerable To Crash The Market Oracle, Jan Skoyles (3/5/17)
A key indicator of a healthy housing market is flashing red in London Business Insider, Thomas Colson (29/5/17)
House Price Data
UK House Prices – links to various sites Economic Data freely available online – Economics Network
Questions
- Why are UK house prices falling?
- What determines the rate at which they are falling? How is the price elasticity of demand and/or supply relevant here?
- How does speculation help to explain changes in house prices? How may speculation help to (a) stabilise and (b) destabilise house prices?
- Draw a demand and supply diagram to show how house transactions will be lower if the market is not in equailibrium.
- Why are house prices falling faster in central London than elsewhere in the UK?
- Why are rents falling in central London? How does this relate to the fall in central London property prices?
- How has the Help to Buy scheme affected house prices? Has it affected both demand and supply and, if so, why and how?
- How do changes in residential property transaction volumes relate to changes in property prices?
- What market imperfections exist in the housing market?
Many countries have experienced soaring house prices in recent years. To find out why, you need to look at demand and supply.
Low mortgage interest rates and more relaxed lending rules in the last couple of years have stimulated demand. In some countries, such as the UK, demand has been further boosted by governments providing increased help to buyers. In others, various tax breaks are given to house purchasers.
Typically the rise in demand has not been matched by an equivalent rise in supply. Social house building has slowed in many countries and building for private purchase has often be hampered by difficulties in obtaining appropriate land or getting planning permission.
The articles linked below look at the situation in Australia. Here too house prices have been soaring. Over the past 30 years they have grown by 7.25% per year – way above the growth in incomes. As the second article below states:
So expensive are homes becoming that the share of median household income devoted to mortgage payments for Australians aged 35 to 44 has more than doubled in 30 years. Incredibly, it’s happened at a time when mortgage rates have slid to their lowest on record.
But why? Again, to understand this it is necessary to look at demand and supply.
Strong population growth combined with easy availability of mortgage loans, low interest rates and tax breaks for both owner occupiers and property investors have stoked demand, while new building has lagged behind. As far as investors are concerned, any shortfall of rental income over mortgage payments (known as negative gearing) can be offset against tax – and then there is still the capital gain to be made from any increase in the property’s price.
But in some Australian towns and cities, price rises have started to slow down or even fall. This may be due to a fall in demand. For example, in Perth, the ending of the commodity boom has led to a fall in demand for labour in the mining areas; mine workers often live in Perth and fly up to the mining areas for shifts of a week or more. 
The fall in demand for labour has led to a fall in demand for housing.
House price changes are amplified by speculation. People rush to buy houses when they think house prices will rise, further pushing up prices. Landlords do the same. This speculation fuels the price rises. Speculation also amplifies price falls, with people with houses to sell keen to sell them quickly before prices fall further. Potential purchasers, including property investors, hold back, waiting for prices to fall.
Articles
House prices are surging because of low supply – it’s Economics 101 The Guardian, Stephen Koukoulas (27/10/16)
Who’s to blame for rising house prices? We are, actually. Sydney Morning Herald, Peter Martin (27/10/16)
The Price of Australia’s Real Estate Boom The New York Times, A. Odysseus Patrick (17/10/16)
Solutions beyond supply to the housing affordability problem The Conversation, Nicole Gurran (24/10/16)
Data
Residential Property Price Indexes: Eight Capital Cities Australian Bureau of Statistics (20/9/16)
Questions
- Identify the specific demand factors that have driven house price rises in Australia.
- How are the price elasticities of demand and supply relevant to explaining house price rises? Use a diagram to illustrate your analysis.
- What determines the rate of increase in house prices?
- Explain what is meant by ‘negative gearing’. How is the tax treatment of negative gearing relevant to the property market?
- What are the arguments for and against giving tax breaks for house purchase?
- Why are rising prices seen as politically desirable by politicians?
- What practical steps could a government (central or local) take to increase the supply of housing? Would such steps always be desirable?
- Does speculation always amplify house price changes? Explain.
- How are house prices related to inequality?
The housing market was at the heart of the 2014 Autumn Statement. Perhaps most eyecatching were the reforms to stamp duty. Stamp Duty is a tax on house purchases. Overnight we have seen the introduction of a graduated system of tax, along the lines of the income tax system – similar to the model to be adopted in Scotland from next April under the Land and Buildings Transactions Tax. For the rest of the UK, there will be five tax bands, including a zero rate band for property values up to £125,000. The total tax liability will be dependent upon the proportion of the value of the property that falls in each taxable band.
But, alongside the Stamp Duty announcement, the Autumn Statement was noteworthy for its references to new build. New build is clearly central to UK housing policy.
The Autumn Statement reaffirmed the government’s wish to see house building play a central role in easing pressures on the housing market. Over the past 40 years or more UK house prices have been characterised by considerable volatility and by a significant real increase. This can be seen clearly in the chart. 
Actual (nominal) house prices across the UK have grown an average rate of 10 per cent per year. Even if we strip out the effect of economy-wide inflation, we are still left with an increase of around 3.5 per cent per year. (Click here to download a PowerPoint of the chart).
The economics point to supply-side problems that mean demand pressures feed directly into house prices. The commitment to build has now seen the announcement of a new garden city near Bicester in Oxfordshire. This is set to provide 13,000 or more new homes. The government has also pledged £100 million to the Ebbsfleet Garden City project to provide the infrastructure and land remediation necessary to bring in more private-sector developers to help deliver an expected 15,000 new homes.
An interesting development in housing policy is the willingness of government to consider being more actively involved itself in house building. The development of former barracks at Northstowe in Cambridgeshire will be spearheaded by the Homes and Communities Agency which will lead on the planning and construction of up to 10,000 new homes. This signals, at least on paper, that government is prepared to think more broadly about the way in which it works with the private sector in helping to deliver new homes.
The desire to facilitate new build appears to make some economic sense. But, the politics of delivering on new homes is considerably more difficult since the prospect of new developments naturally raises considerable local concerns. Furthermore, it does not deal with fundamental questions around the existing housing market stock. In particular, how we can further increase investment in our existing housing stock, especially given the significant land constraints that face a country like the UK. As yet, the debate around how to improve what we already have has not really taken place.
Autumn Statement
Autumn Statement: documents Gov.UK
Articles
Autumn Statement: Government will build tens of thousands of new homes Independent, Nigel Morris (2/12/14)
Government could build and sell new homes on public sector land Guardian, Patrick Wintour (2/12/14)
Bicester chosen as new garden city with 13,000 homes BBC News, (2/12/14)
Nick Clegg reveals coalition plan for new garden city in Oxfordshire Guardian, (2/12/14)
State to build new homes for first time in generation Telegraph, Steven Swinford (2/12/14)
Data
House Price Indices: Data Tables Office for National Statistics
Questions
- Explain the distinction between real and nominal house prices.
- Would you expect real house price inflation to always be less than nominal house price inflation?
- What factors are likely to affect housing demand?
- What factors are likely to affect housing supply?
- Show using a demand-supply diagram the impact of rising incomes on the demand for a particular housing market characterised by a price inelastic supply.
- Would we expect all housing markets to exhibit similar characteristics of housing demand and supply?
- What is the economic rationale for the government’s new build policy?
- What other measures could be introduced to try and alleviate the long-term pressure on real house prices?
- How might we go about assessing the affordability of housing?
- Would a policy which reduced for the stamp duty payment of most buyers help to curb inflationary pressures in the housing market? Explain your answer using a demand-supply diagram.
The British love to talk about house prices. Stories about the latest patterns in prices regularly adorn the front pages of newspapers. We take this opportunity to update an earlier blog looking not only at house prices in the UK, but in other countries too (see the (not so) cool British housing market). This follows the latest data release from the ONS which shows the UK’s annual house price inflation rate ticking up from 10.2 per cent in June to 11.7 per cent in July and which contrasts markedly with the annual rate in July 2013 of 3.3 per cent.
The July annual house price inflation figure of 11.7 per cent for the UK is heavily influenced by the rates in London and the South East. In London house price inflation is running at 19.1 per cent while in the South East it is 12.2 per cent. Across the rest of the UK the average rate is 7.9 per cent, though this has to be seen in the context of the July 2013 rate of 0.8 per cent.
Chart 1 shows house price inflation rates across the home nations since the financial crisis of the late 2000s. It shows a rebound in house price inflation over the second half of 2013 and across 2014. In July 2014 house price inflation was running at 12.0 per cent in England, 7.6 per cent in Scotland, 7.4 per cent in Wales and 4.5 per cent in Northern Ireland. If we use the East Midlands as a more accurate barometer of England, annual house price inflation in July was 7.6 per cent – the same as across Scotland. (Click here for a PowerPoint of the chart.)
Consider a more historical perspective. The average annual rate of growth since 1970 is 9.7 per cent in the UK, 9.7 per cent in England (9.6 per cent in the East Midlands), 9.6 per cent in Wales, 8.8 per cent in Scotland and 8.7 per cent in Northern Ireland. Therefore, house prices in the home nations have typically grown by 9 to 10 per cent per annum. But, as recent experience shows, this has been accompanied by considerable volatility. An interest question is the extent to which these two characteristics of British house prices are unique to Britain. To address this question, let’s go international.
Chart 2 shows annual house price inflation rates for the UK and six other countries since 1996. Interestingly, it shows that house price volatility is a common feature of housing markets. It is not a uniquely British thing. It too shows shows something of a recovery in global house prices. However, the rebound in the UK and the USA does appear particularly strong compared with core eurozone economies, like the Netherlands and France, where the recovery is considerably more subdued. (Click here for a PowerPoint of the chart.)
The chart captures very nicely the effect of the financial crisis and subsequent economic downturn on global house prices. Ireland saw annual rates of house price deflation exceed 24 per cent in 2009 compared with rates of deflation of 12 per cent in the UK. Denmark too suffered significant house price deflation with prices falling at an annual rate of 15 per cent in 2009.
House price volatility appears to be an inherent characteristic of housing markets worldwide. Consider now the extent to which house prices rise over the longer term. In doing so, we analyse real house price growth after having stripped out the effect of consumer price inflation. Real house price growth measures the growth of house prices relative to consumer prices.
Chart 3 shows real house prices since 1995 Q1. (Click here for a PowerPoint of the chart.) It shows that up to 2014 Q2, real house prices in the UK have risen by a factor of 2.4 This is a little less than in Sweden where prices are 2.6 times higher. Nonetheless, the increase in real house prices in the UK and Sweden is significantly higher than in the other countries in the sample. In particular, in the USA real house prices in 2014 Q2 were only 1.2 times higher than in 1995 Q1. Therefore, in America actual house prices, when viewed over the past 19 years or so, have grown only a little more quickly than consumer prices.
The latest data on house prices suggest that house price volatility is not unique to the UK. The house price roller coaster is an international phenomenon. However, the rate of growth in UK house prices over the longer term, relative to consumer prices, is markedly quicker than in many other countries. It is this which helps to explain the amount of attention paid to the UK housing market. The ride continues.
Data
House Price Indices: Data Tables Office for National Statistics
Articles
Property prices in all regions of the UK grow at the fastest annual pace seen in seven years Independent, Gideon Spanier (16/9/14)
UK House Prices Have Not Soared This Fast In Seven Years The Huffington Post UK, Asa Bennett (16/9/14)
UK house prices hit new record as London average breaks £500,000 Guardian, Phillip Inman (6/12/14)
Six regions hit new house price peak, says ONS BBC News, (16/9/14)
Welsh house prices nearing pre-crisis peak BBC News, (16/9/14)
Questions
- What is meant by the annual rate of house price inflation? What about the annual rate of house price deflation?
- What factors are likely to affect housing demand?
- What factors are likely to affect housing supply?
- Explain the difference between nominal and real house prices. What does a real increase in house prices mean?
- How might we explain the recent differences between house price inflation rates in London and the South East relative to the rest of the UK?
- What might explain the very different long-term growth rates in real house prices in the USA and the UK?
- Why were house prices so affected by the financial crisis?
- What factors help explain the volatility in house prices?
- How might we go about measuring the affordability of housing?
- In what ways might house price patterns impact on the macroeconomy?
House prices have been rising strongly in London. According to the Halifax House Price index, house prices in London in the first quarter of 2014 were 15.5% higher than a year ago. This compares with 8.7% for the UK as a whole, 1.3% for the North of England and –1.5% for Scotland. CPI inflation was just 1.6% for the same 12-month period.
The London housing market has been stoked by rising incomes in the capital, by speculation that house prices will rise further and by easy access to mortgages, fuelled by the government’s Help to Buy scheme, which allows people to put down a deposit of as little as 5%. House prices in London in the first quarter of 2014 were 5.3 times the average income of new mortgage holders, up from 3.5 times in the last quarter of 2007, just before the financial crisis.
Concerns have been growing about increasing levels of indebtedness, which could leave people in severe financial difficulties if interest rates were to rise significantly. There are also concerns that an increasing proportion of people are being priced out of the housing market and are being forced to remain in the rental sector, where rents are also rising strongly.
But how can the housing market in London be dampened without dampening the housing market in other parts of the country where prices are barely rising, and without putting a break on the still relatively fragile recovery in the economy generally?
The Governor of the Bank of England has just announced two new measures specific to the housing market and which would apply particularly in London.
The first is to require banks to impose stricter affordability tests to new borrowers. Customers should be able demonstrate their ability to continue making their mortgage payments if interest rates were 3 percentage points higher than now.
The second is that mortgage lenders should restrict their lending to 4½ times people’s income for at least 85% of their lending.
Critics are claiming that these measures are likely to be insufficient. Indeed, Vince Cable, the Business Secretary, has argued for a limit of 3½ times people’s income. Also banks are already typically applying a ‘stress test’ that requires people to be able to afford mortgage payments if interest rates rose to 7% (not dissimilar to the Bank of England’s new affordability test).
The videos and articles look at the measures and consider their adequacy in dealing with what is becoming for many living in London a serious problem of being able to afford a place to live. They also look at other measures that could have been taken.
Webcasts and Podcasts
The Bank of England announces plans for a new affordability test BBC News (26/6/14)
Bank of England moves to avert housing boom BBC News, Simon Jack (26/6/14)
Bank of England to act on house prices in south-east BBC News, Robert Peston (25/6/14)
Bank of England measures ‘insure against housing boom’ BBC News, Robert Peston (26/6/14)
Carney: There is a ‘new normal’ for interest rates BBC Today Programme, Mark Carney (27/6/14)
Articles
Bank of England imposes first limits on size of UK mortgages Reuters, Ana Nicolaci da Costa and Huw Jones (26/6/14)
Stability Report – Mark Carney caps mortgages to cool housing market: as it happened June 26, 2014 The Telegraph, Martin Strydom (26/6/14)
Bank of England cracks down on mortgages The Telegraph, Szu Ping Chan (26/6/14)
Mortgage cap ‘insures against housing boom’ BBC News (26/6/14)
Viewpoints: Is the UK housing market broken? BBC News (26/6/14)
How can UK regulators cool house prices? Reuters (25/6/14)
Bank will not act on house prices yet, says Carney The Guardian, Jill Treanor and Larry Elliott (26/6/14)
Mark Carney’s housing pill needs time to let economy digest it The Guardian, Larry Elliott (26/6/14)
Bank Of England Admits Plans To Cool Housing Market Will Have ‘Minimal’ Impact Huffington Post, Asa Bennett (26/6/14)
Carney Surprises Are Confounding Markets as U.K. Central Bank Manages Guidance Bloomberg, Scott Hamilton and Emma Charlton (26/6/14)
House prices: stop meddling, Mark Carney, and bite the bullet on interest rates The Telegraph, Jeremy Warner (27/6/14)
Mark Carney’s Central Bank Mission Creep Bloomberg, Mark Gilbert (26/6/14)
Consultation paper
Implementing the Financial Policy Committee’s Recommendation on loan to income ratios in mortgage lending Bank of England (26/6/14)
Bank of England consults on implementation of loan-to-income ratio limit for mortgage lending Bank of England News Release (26/6/14)
Data
Links to sites with data on UK house prices Economic Data freely available online, The Economics Network
Questions
- Identify the main factors on the demand and supply sides that could cause a rise in the price of houses. How does the price elasticity of demand and supply affect the magnitude of the rise?
- What other measures could have been taken by the Bank of England? What effect would they have had on the economy generally?
- What suggests that the Bank of England is not worried about the current situation but rather is taking the measures as insurance against greater-than-anticipated house price inflation in the future?
- Why are UK households currently in a ‘vulnerable position’?
- What factors are likely to determine the future trend of house prices in London?
- Is house price inflation in London likely to stay significantly above that in other parts of the UK, or is the difference likely to narrow or even disappear?
- Should the Bank of England be given the benefit of the doubt in being rather cautious in its approach to dampening the London housing market?
According to the Halifax house price index, house prices fell in the UK in the three months to April. This is the first quarterly fall since 2012. The Nationwide index (see below), shows that prices in April were 0.4% lower than in March (although the 3-month rate was still slightly positive).
Lower house prices and falling sales is a picture repeated in many parts of the UK. It is particularly marked in central London. There, estate agents have begun to offer free gifts to purchasers. As The Guardian puts it:
