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House prices have stalled – and depending on what Rachel Reeves does in the Budget on 26 November, they may start to fall in 2026. In London that is already happening.
This summer has seen a marked change in the mood of the market, particularly for more expensive homes in the capital. Last year house prices were resilient, rising by around 4 per cent, according to the Nationwide Building Society.
That was despite the problems of affordability. At the end of 2024 Nationwide acknowledged that the increase in stamp duty would cause uncertainty, but still expected prices to rise by between 2 per cent and 4 per cent in 2025, helped by lower interest rates and rising wages.
Things have now changed. Prices fell by 0.1 per cent in August, and are down 0.4 per cent over the past three months. Estate agents Savills now thinks there will be just 1 per cent overall growth this year. Central London has been particularly badly hit, with recent declines coming on top of a gradual downward slither of prices. Savills also notes that prices in prime central districts are now down 22 per cent from their peak in 2014.
Fellow estate agents Knight Frank expect this trend to continue, with falls of another 4 per cent next year for these central districts and flat prices for prime outer London.
Allow for inflation running at around 4 per cent, and with earnings climbing at nearly 5 per cent, that means that in the space of a year London family homes could be substantially more affordable than they are now.
That raises two huge questions. Why are more people not buying? And does it matter to the rest of the country if the London housing market hits the buffers?
The answer to the first is partly that if you think something will become cheaper you are in less of a hurry to buy. Everyone understands that the house prices move in cycles and at the moment it is a buyer’s market. But behind that issue are fears about the forthcoming Budget.
There have been a string of stories suggesting that there will be tax increases on more expensive homes. These include a capital gains tax or a wealth tax on the value of a home worth more than some fairly high figure, perhaps £1m. That would not affect many properties outside London and the South East, but it would apply to one in 42 homes across the country.
If it were a capital gains tax it would only be paid when a home was sold; if a wealth tax it would be an annual levy. One form of the wealth tax would be new higher council tax bands for more highly valued homes. The advantage of that, from the government’s point of view, is that it would simply be an increase of a tax already in place, rather in the way in which second homes in many places are currently charged a higher rate than primary residences.
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No decisions have yet been made. What seems to be happening is that the Government is deliberately leaking possible tax increases to sound out how much opposition there will be to the different plans. It is keeping its options open. That makes political sense, but it also casts a dark cloud across the market for more expensive houses until people know what will happen. So potential buyers are holding off.
And so, does this matter? The further you move away from London, the stronger the market is right now. According to Zoopla, the online estate agency, homes in the North of England get an offer in 26 days on average, whereas in the South it is 39 days. Earlier this year the agency thought that the greatest gains in prices would be in Scotland and the North of England, with Glasgow, Edinburgh and Newcastle high up the league.
That’s probably still true. So you could say that what we are seeing is a more even level of prices across the country, with the premium on London and the South East declining. It’s a levelling up – and a levelling down. Many people would welcome that for obvious reasons.
The trouble is that if the market for more expensive homes becomes depressed that can lead to a knock-on effect further down the market. People who can hold off selling do so, while those forced to get rid of their property have to take a large loss. That nasty beast “negative equity”, when a home is worth less than the mortgage on it, would again stalk the land.
The last thing this Government would want to do is trigger a wider property crash and I am not suggesting that it will. But it would be wrong to exclude the possibility if Rachel Reeves misjudges the impact of higher property taxes come November.
Need to know
House prices are an endlessly fascinating topic, and for obvious reasons. Some 64 per cent homes in the UK are owner-occupied, so the proportion of the population living in such a property must be something close to that.
In terms of money, this accounts for some 40 per cent of the total wealth of households, approximately the same as pension rights. It is the main reason why the median household in the South East of England is worth nearly £500,000. And of course everyone wants to know what the house next door or the flat below went for.
But there is a fragility here too, as anyone who remembers the 2008 financial crisis will recall. From a macro-economic perspective that was all about banks becoming over-leveraged, buying bundled sub-prime mortgages and so on. From a personal point of view it was about people going into negative equity and in some cases losing their homes.
As far as the economy is concerned the housing market is hugely important. There is the wealth effect, whereby if house prices rise people feel richer and therefore are more inclined to spend money. There is also an impact on consumption from the level of activity, as opposed to the level of prices. That is because when people move home they pay fees to agents, spend money on building renovations and redecoration, and buy new consumer durables – fridges, cookers and the like. A housing boom boosts demand, and hence overall growth, while a slump is frequently associated with recession.
So you can see the point. If the Chancellor clobbers the housing market, as she may, she will clobber the economy as a whole. It’s difficult to model this. You can feed in shifts in interest rates and changes in real incomes to see what, other things being equal, might happen to house prices.
But it is hard to know to what extent a tax increase on expensive homes will feed though to activity, prices and hence overall demand for one very simple reason. There’s not much experience of any government doing this. We have seen the impact of increases in capital gains tax and stamp duty on tax revenue. For example, we know that the changes brought in by the last government actually cut government receipts. Not very bright.
And I suppose we are getting some feeling for the impact of higher council taxation on second homes on those markets too. But we really have no idea whether the sort of ideas being kicked around ahead of the Budget could trigger a housing market crash, and what the knock-on impact of that would be. The Treasury is flying blind.
It’s uncomfortable. To make a point made in these columns earlier, there’s a lack of experience in the Treasury of the world of business and the influence of markets. There’s an intellectual case for trying to increase property taxation, but my word, if Rachel Reeves gets this one wrong she will be in Liz Truss territory.
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