The UK woke up today to headlines stating that house prices have achieved their most significant monthly fall in more than two years, according to Nationwide survey data, with a 0.8% drop last month, the largest of significance since February 2023. There will be much discussion about why, with reasoning pointing to the stamp duty changes, economic anxiety, or the fact that prices were already high and will naturally correct. However, notice the use of the word 'achieved', which suggests a positive tone? That may seem strange in a world hypnotised by the need to watch numbers go up to symbolise value, but to pause and go against the grain here, in this week’s blog we put aside the known unknowns, and focus on a paradoxical but valid economic argument, one that UK house prices must first fall to reset affordability and stimulate demand, which will ultimately lead to a healthier, more sustainable price growth. It's undoubtedly better for investors and borrowers because the value lies in the transaction power, not the assets themselves. Sometimes, in life, you just have to take a step backwards to move forward.
What do you mean by transaction power? Well, in economic terms, for a market to function, you want the valuation to be in line with the fundamentals that support it. You want the assets to rise in value almost continually, which, as we have discussed in previous pieces, is virtually guaranteed to happen in a debt creation economy, but only if the fundamentals move in correlation with the assets, in this instance, income levels and managed interest rates. If the assets, i.e., the UK housing market, are overvalued relative to earnings and needs, markets naturally restore affordability and reactivate genuine demand from buyers. Hence, the word "achieved" implies that markets tend to heal themselves without intervention. If the bid in the market is waning, the offer will simply adjust to bolster it, and that's not a bad thing; that in itself is a sign of growth.
Robert Gardner, Nationwide's chief economist, mentioned in his statement that unemployment rates remain low, earnings are still outpacing inflation, and alluded to borrowing costs becoming cheaper if the Bank of England cuts rates again, which will help the market find balance, but the general mood is there could be further to go, to find the balance we need.
The UK housing market is caught in a paradox: despite record-high prices, it is fundamentally broken because of issues with transaction power, while property owners and investors have benefited from decades of sustained house price growth, much of the country has been priced out of homeownership entirely, and perhaps an uncomfortable but necessary conclusion is: for the market to function, to sustain, and to grow, house prices need to rebalance. Developers need to sell a lot of houses; they require a stronger bid, and market forces will eventually drive that. So, savvy investors in our sector are seeing an opportunity to benefit from what could be a wave of construction in the wake of any correction, fuelled by finance carefully leveraged to support a rebalanced market.
Now, this is not a Jerry McGuire "The Things We Think and Do Not Say" moment, to paraphrase pop culture; despite the nod to it in the title, this is not an admission about the inevitability of penalising homeowners or deflating the economy. It is about affordability rebalancing and bringing house prices back into line with local wages and economic fundamentals. Over the past two decades, UK house prices have grown far faster than incomes. According to the Office for National Statistics, the average house now costs more than 8.3 times the average earnings in England, with that ratio exceeding 12 times in London. Paradoxically, the very price levels that were once seen as a sign of market strength are now choking off its future growth.
Witnessing prices begin to fall is not a crisis; it is a corrective mechanism. As affordability improves, demand revives. Buyers who have been locked out start to re-engage with the market, creating the conditions for broader participation and more stable long-term growth. This is what economists refer to as a rebalancing, a reset that enables markets to grow on healthier foundations.
Crucially, affordability rebalancing doesn't require a crash. It will likely occur in our housing market through a combination of real-terms soft stagnation (where nominal prices stay flat while wages rise) or modest nominal declines, we know this through the other bid in the market, the institutional one, keeping the supply and demand tilted towards high demand, and that is great for our sector, one that serves two masters, our investors, and our home builders. Affordability rebalancing is not an easy political message, but it is a necessary economic one to understand. Perhaps most simply put, the value lies in people's ability to buy houses, not in the bricks themselves; transaction power is everything.
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