UK property is cheaper than twenty years ago

You may think I’m mad writing the title “UK property is cheaper than twenty years ago” if you’ve even the most basic grasp of the UK’s housing market. On the face of it, you’d be right too. The average property in the UK twenty years ago cost £153,482, compared to £266,640 today. 

One of the continuing words on many newsreaders’ lips throughout 2024 though has been ‘inflation’, which may give you a little clue as to where I’m heading with this…

You see, Nationwide Building Society produces some fascinating house price data. Amongst them are the ‘UK house prices adjusted for inflation’ figures, in which Nationwide use the Office for National Statistics Retail Price Index (RPI) to convert the actual house prices into an inflation adjusted one. Doing so paints quite a different story for the UK’s housing market over the past two decades. 

For example, as mentioned earlier, a typical property twenty years ago (Q3 2004) would, on average, have cost £153,482 at the time. To buy the amount of ‘retail goods’ today that you could have bought then for that figure would now cost you £319,064 though i.e. more than the average UK home now costs (£266,640 as of Q3 2024). That is to say that overall inflation, measured via RPI, has increased more than UK house prices in the past twenty years.

In theory then, property in the UK should feel ‘cheaper’ than twenty years ago (despite actually increasing by 74% in price). So why is it that not many people feel like that? 

I believe that largely comes down to incomes not keeping pace with property prices. This is evident when looking at median annual incomes: £21,996 in 2004 vs £36,712 today (+67%). Add in a greater level of taxation and our net pay is even further adrift when it comes to housing ‘affordability’.

That is, however, in contrast to the minimum wage, which has outpaced house prices over the past twenty years. Consider that the minimum wage was £4.85ph at the end of 2004 and is now £11.44ph. That’s a 136% increase vs the 74% increase in house prices over the same period. And the minimum wage is set to increase by another 6.7% next April…do you think property prices will increase by 6.7% next year? If not, they should in theory become more ‘affordable’ for lower income households.

You’ll note the chart below shows the inflation adjusted house prices as having fallen quite sharpish these past couple of years. That is because actual house prices have dropped a fraction in that time (from a peak of £273,135 in Q3 2022), whilst inflation in the same period has raced up by 13%. But with inflation having steadied this year (it is currently at 2.6% in the year to November) things are starting to level out. 

As around 100,000 households a month continue to come off their (super cheap) fixed mortgage rates, it may be that interest rates hold the key here. Indeed, if inflation is truly under control, all economic indicators suggest interest rates will drop and a new wave of house price inflation could yet commence, which would bring them more in line with their longer-term ‘above inflation’ trend.

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