Summary of Yolande Barnes’s contribution to “Where Next for House Prices” (with some additions) at FT Weekend Festival, 2 September 2023.
Where will house prices be this time next year?
I think it’s inflation that’s going to strip out the value of housing over the next year by about 5%, and indeed, it already has (significantly) this year. Real house prices in June were down by over 14% on March 2022 levels according to the Nationwide Building Society. But rises or falls will depend on which housing market you’re talking about. When we talk about UK house prices, what do we actually mean? Usually, it’s the properties that transacted within a given time period. These properties can change substantially over time according to market conditions so we’re not always comparing like with like between bull markets and bear markets. Some housing markets even now are still rising and others have been suffering horribly since the lockdown. So, I think this whole conversation has to become a lot more nuanced. We forget that only 26% of households are actually mortgaged. A huge number of owner-occupiers own outright without a mortgage. And increasing numbers, of course, are renting. So, talking about only the mortgage market, as some house price measures do, is becoming a really esoteric sort of exercise.
We’ve had 15 years of incredibly low rates. Are we now entering a new era of high interest rates? And how does that shape the property market?
I would hesitate to call it a new era. Actually, I think what we’re entering is a very old era. And to illustrate that, what I want to say is that actually we’re all living in the late 20th century in terms of our expectations and even language about housing. And the late 20th century was a very, very peculiar period in history.
If you look at the previous couple of hundred years before the second world war, Bank of England base rates averaged 4%, with some fluctuations between 2% and 6%. We are thinking now about 6 per cent rates being high and expecting that 4% or 5%, mortgage rates to be normal. Well, that’s really kind of “back to the future,” isn’t it? It’s certainly different to the high double-digit interest rates of the 1970s and 1980s when a lot of the discourse around house prices and housing markets became embedded in the national psyche. I think what we’ve got to get used to now is a very different sort of way of thinking about housing.
Talk in this sort of forum always ends up being about people “getting on to the housing ladder” and the difficulty of young people getting on to the “housing ladder.” I think that the notion that housing is a “ladder” is fundamentally flawed in the 21st century. I think the housing market looks much more like a high platform. Maybe you need a ladder (or a leg-up from the bank of Mum and Dad) to get on to it. But I think our mentality, which has in the 20th century actually thought about the housing market being an ever-upward escalator, has to change. The sort of current environment, and what we’re looking at over the longer term, say to 2030 and beyond, is much more stable, low growth, low interest rate compared to recent historic standards (but normal by very long-run standards).
Does 2022 look like the kind of high-water mark for property prices for the foreseeable future?
In real terms, yes. But I think so much depends on what happens to real incomes. There’s a correlation between average house prices and average real income growth. And that has been pretty dismal recently on both counts. I think house prices are still about 7% down in real (inflation-adjusted) terms since 2010. And I think it’s something people kind of feel -but we’re all caught up in this language of ever rising (nominal) house prices. But actually, in real terms, a home isn’t worth as much as it was in previous periods. I think the peak in real house prices was somewhere around the third quarter of 2007.
If you ask people the question, “Are houses more expensive now than they used to be in 2007?” you can look at nominal prices and say, yes, they’re twice the price. Or you can look at real prices and say, no, they’re not.
Are either real or nominal house price growth actually perfect measures? What if you looked at the way house prices are a multiple of people’s earnings, you’ll see they’ve gone from about four-ish, five-ish times in 2007 to 10, 11 times.
I love the idea of a “perfect measure” I just smiled to myself slightly at the notion there is such a thing. Again, this is incredibly nuanced because we tend to look at individual earnings when it is household income and disposable household income that matters. And I think, again, you’re talking about some real extremes in experience. For most people, especially young people, the big affordability barrier is entry to the housing market in terms of equity. So, borrowing costs are, dare I say, less important than this issue of how you get hold of a few, tens or even hundreds of thousands of pounds to pay your deposit.
If you’re paying presently 50% in rent on the price of an interest-only mortgage, the only reason it would seem to me to make sense to buy is that in future that property would go up in price. But if you’re saying that the housing is not a ladder but a platform to climb up to, then either the rents are going to go up or the housing prices are going to go down, in which case it sounds like it makes sense to wait to buy?
I think there’s going to be continued high rises in rentals because of a supply-demand imbalance. And it’s going to vary enormously but by and large I think you’re going to see rents rising so that probably by next year or the year after (especially as mortgage rates adjust downwards slightly), they once again are more expensive than paying that interest-only mortgage.
For the parts of the market I’ve been looking at, build cost is high but house prices are flat. There’s not that much margin before you’ll be in negative equity if you buy something that needs a bit of work for a fixer-upper. And price increases and build cost have not really been priced into houses that needs fixing up. So what do you think is going to happen to that part of the market?
Just because house prices aren’t rising doesn’t mean to say there aren’t buying opportunities now. And I’m really interested to hear that the fixer-upper is coming back into vogue. I have worries about the cost of construction and the overall cost of doing it, but it illustrates I think that there are other ways of finding value in property. Spotting the popular places, the good places, the prosperous places, the places that are seeing increasing productivity where especially young people want to go to is a part of that. You don’t necessarily have to be fix up properties physically, but spotting the qualities that the new demand is looking for is another way of achieving a value return in a stable-price market.
If we think about 2008 and the last time there was any notable downturn, the recovery speeds were very, very geographically split. Right? And they were in very different specific sections of the market. What do we think is going to happen next?
I think we can take our clues from what’s happening in the rental market. I like rentals because they are really good indicators of a very fundamental phenomenon: people voting with their feet in terms of demand. So my advice would be is to look at what’s happening in a local area. And I was really interested to find that in the year of the pandemic, so the year to September 2021, the biggest rental rises (while rents in inner London fell by about 7%), were in Rochdale, Altrincham, Folkestone and Farnham. So towns and small cities, good places with a heritage and regeneration aspect to them. I think we’re going to continue to see those kind of really qualitative differences between certain places and certain types of property.
Generally speaking, your newly built single-aspect city centre flat with no outside space is going to suffer relative to the good little terraced house or semi with a garden in one of those “good places.” So the future of value growth is so nuanced. It is going to be really difficult to see it, to “get it out of the data” as it were. But I think it’s going to show up in people’s experiences of buying.
Adapted from a transcript of the “Where next for House Prices” session of the FT Weekend Festival on 2 September 2023.
