Thursday 21 December 2023

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 £129,761, compared to £260,181 today. 

One of the buzz words of 2023 though seems to have 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 2003) would, on average, have cost £129,761 at the time. To buy the amount of ‘retail goods’ today that you could have bought then for that figure would now cost you £268,641 though i.e. more than the average UK home now costs (£260,181 as of Q3 2023). 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 doubling 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: £21,124 in 2003 vs £34,963 today (+66%). 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 £4.50ph at the end of 2003 and is now £10.42ph. That’s a 132% increase vs the 100% increase in house prices over the same period. And the minimum wage is set to increase by another 9.8% next April…do you think property prices will increase by 9.8% next year? No? In which case, they should in theory become more affordable.

You’ll note the chart below shows the inflation adjusted house prices as having fallen quite sharpish these past 18 months. That is because actual house prices have dropped a fraction in that time, whilst inflation in the same period has raced up by 17%. But with inflation having dropped to 3.9% in the year to November (and is close to zero over the past six months), change may be afoot. 

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 brought 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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