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Buying a home is always a scary decision. For most people, it is a hugely important financial commitment – and all the more so now with prices wobbling, mortgage rates climbing, and lots of unsold flats overhanging the market.
Things change so fast. Three months ago it looked as though interest rates would come down further and the experts were forecasting a modest rise in prices overall this year. Now, while in the past couple of days the mortgage situation has eased a little, the markets still expect the next move of interest rates to be up, not down, and the lender Halifax has reported that prices have barely risen over the past 12 months and are currently falling.
So, how can we think about this sensibly? Here are 10 things to help guide anyone thinking of moving home – but before we start, let’s state the essential public wealth warning. That is that everyone’s circumstances are different, and that no one can predict any market with total confidence. So what follows is only a best guess at what might happen.
One: for most of the 20th century, prices in the UK were on average between four and six times average earnings. Before 1900, they were higher; indeed around 1850 they were over 10 times earnings, and after 2000 they have also been higher, reaching a peak of more than nine times earnings in 2021. Now they have eased back, with the Office for National Statistics calculating that, in England, they were between seven and eight times earnings in 2025. Given the rise in money wages and the stagnation in prices in recent months, they may be below seven times now.
The bottom line therefore is that while houses are still expensive relative to earnings, they are close to the top end of their historical average. They are no longer outrageously high.
Two: inflation and earnings will continue to climb by more than two per cent and quite probably more like three per cent over the next couple of years. The latest Consumer Prices Index is up to 3.3 per cent, and expected to climb to four per cent. This increase in money wages will eventually rescue many people who bought homes on expensive mortgages by taking pressure off their monthly repayments. But the relief will come through slowly.
That is because of point three: interest rates will stay relatively high. They have to in order to keep the pressure pressing down on inflation. It may seem unfair that a war in the Middle East should determine what the Bank of England does to the cost of borrowing, but higher interest rates are the most effective weapon the central banks have to curb inflation.
Four: taxes will, I’m afraid, stay high too, for all the reasons discussed every day right across the developed world. The UK is not in a comfortable position, though arguably not as bad as some other countries. So to be realistic, taxes on property will increase alongside all the others, as we are already seeing what this Government is doing with higher rates, the increase in stamp duty and the mansion tax. As a result, another property boom looks a long way off.
But – point five – that does not mean that all areas of the country will see stagnation. Those Halifax numbers show that in Northern Ireland prices are up 8.7 per cent in the past year, while in the South East they are down by nearly two per cent. We talk above averages but it is local conditions that drive the market in the short term. One of the features that has undermined the top end of the London market has been the exodus of wealthy foreigners, something that does not affect 99 per cent of UK properties.
Six: that divergence applies to different types of homes too. Flats are deeply out of fashion, whereas family houses remain in solid demand. There are many reasons for this, including the desire of landlords to sell the flats they are renting out before the new tenant protection legislation comes in. Again, averages conceal large variations.
Seven: most people want to own their own homes. The most recent official figures for England are for 2023, and these showed that 62.4 per cent of homes were owner-occupied, 20.8 per cent were privately rented, and 16.7 per cent socially rented. The peak for ownership in England, 71 per cent, was back in 2003. But if you ask people whether they would like to own their home, the proportion is much higher. An Ipsos survey showed that three-quarters of renters would like to buy rather than rent, while multiple studies suggest that up to 80 per cent of people would choose to be owners, if they could do so. This desire underpins the entire market.
So, point eight is that homeownership is still, for most people, the right thing to do for personal and emotional reasons, quite aside from the financial arguments.
Point number nine leads to the popular question of whether it is better to save in property or a pension. The answer is surely: both. Looking back, the financial pendulum swings both ways, with anyone buying a home in the early 2000s probably doing better than they would have done with their pension savings. But someone who bought a central London flat 10 years ago may well have lost money, whereas global equities have more than doubled in real terms.
Finally, a bit of neck-sticking-out. Back to the wall, what do I think will happen on average to the UK property market in the coming years? Deep breath. I think it will be weak for the next three because short-term there are a lot of headwinds. But there will be a reasonable recovery towards the end of this decade and a solid performance through into the 2030s.
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I don’t like to be political but I am afraid that among those headwinds is Rachel Reeves’s role as Chancellor. At best I can’t see a general revival of economic confidence while she remains in post, and at worst there may be some sort of financial crisis in the next year or so, probably associated with a surge in gilt yields and maybe a run on the pound. So, while the fundamentals of the housing market remain strong, they will be undermined by UK fiscal concerns.
The key is that ratio between prices and earnings. The best source I have found on this is a report by Schroders, the wealth managers, from a couple of years ago. There is a graph that gives a very good feeling for what has happened. It is possible that we will head all the way back to prices being four times earnings, the bottom of the range, before recovering. If that happens, then prices could be flat in nominal terms through to the early 2030s, falling another 30 per cent or so in real terms. Intuitively, though, I don’t think they will go back that far, hence my call that the recovery will be coming through by the end of this decade.
After all, we need a lot more homes to house our population comfortably. We also need to build larger ones. There is a bit of pushback by homebuilders, arguing that because new homes use space more efficiently than older ones their size doesn’t matter too much. There is a statement here about this. But if you look at the homes they show on the website, they look pretty boxy to me. There is a research project here by University College London into the proliferation of small homes, which is in its early stages and we will see what they come up with.
But the lesson from the London flat market – trapping first-time buyers in places they can’t sell because there is so little demand for them – is that surely what people want is the thing that matters, not what planners think they ought to want. Growl.
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