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Fall in house prices won’t save the market

Misplaced optimism? Credit: Getty

February 26, 2024 - 2:00pm

Have house prices bottomed? That’s the conclusion of an analysis published yesterday by the Financial Times. After surveying the 37 developed countries of the OECD, it concluded that, on average, house prices have stopped falling and, with central banks poised to start cutting interest rates soon, they’ll resume rising this year.

Admittedly, given the range of countries surveyed, there’s considerable variation. Prices are still falling in some markets, such as Germany; in others, such as the United States, they never really fell. On balance, though, the residential property market looks to have held up pretty well through the rise in interest rates, and is certainly looking healthier than the commercial sector. The sharp falls in house prices that were expected after central banks drove up mortgage rates never really happened. Real estate analysts are thus predicting that happy days will soon be here again.

Still, one might want to hold off uncorking the champagne a bit longer. Nominal falls in house prices may have ended up being pretty modest. But once increased inflation over the last three years has been factored in, with cumulative price increases well into double digits, real declines look more impressive. As for the future trend, the widespread expectation that interest rates will be coming down by much this year could yet be misplaced. In the United States in particular, inflationary pressures are now building in the economy, and we may well see an uptick in consumer prices later this year.

On top of that, the huge run-up in borrowing during the pandemic, along with the Biden administration’s ambitious industrial programme, has created a mountain of government debt. In consequence, a huge amount of bond issuance is expected to hit the market later this year, and it’s not clear how easily it will be absorbed by investors. Reflecting this prospect, bond markets have been slumping recently, pushing up interest rates even amid talk of imminent easing. And if interest rates in the US fail to come down quite as expected, it will become more difficult for other central banks to plunge headlong into easing cycles.

Of course, interest rates aren’t the only thing which determine house prices. Supply constraints in many markets, such as planning regulations which limit new housebuilding, are helping to prop them up. Meanwhile some governments are using fiscal policy to support prices. In Britain, for instance, where the housing market is considered both economically and politically too big to fail, the upcoming Budget is expected to contain some demand-stimulus measures which will aim to bring new buyers onto the market.

Nevertheless, if inflation and interest rates prove more stubborn than the current spring optimism assumes, rebounds in house prices may not be so impressive. Even the current uptick in nominal house prices is still largely cancelled out by inflation. That may in fact be a sign of things to come — an end to falling prices, albeit followed by a long stagnation in some markets. Instead of a bubble bursting, we may see a long, steady deflation.

Over time, therefore, it may be that the property market begins to favour buyers over sellers. That seems even more likely where real wage gains remain positive, as they largely are now, because prospective homebuyers who see housing affordability steadily improving may realise the advantages there are to delaying purchases rather than rushing onto the property ladder. If so, it would amount to a regime change in what has been one of the economy’s most reliable money-making segments.


John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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Matt M
Matt M
4 months ago

So long as net immigration remains high, house prices will never fall. If you want to bring down house prices to a level where it is possible for a young couple to buy a home big enough to start a family, you need to reduce immigration to a level that matches house building.
Also propping up house prices is less important in Britain now than it was 20 years ago because almost 60% of home owners have now paid off their mortgages and so are not susceptible to negative equity etc. This probably makes falling house prices a net positive for the public.

UnHerd Reader
UnHerd Reader
4 months ago
Reply to  Matt M

Or you just need people whose children flew the nest long ago to move out of their 4 or 5 bedroom homes in the commuter belts.

Matt M
Matt M
4 months ago
Reply to  UnHerd Reader

There is no disincentive to downsizing later in life. Lots of people do it. Or would you like it to be mandatory?

UnHerd Reader
UnHerd Reader
4 months ago
Reply to  Matt M

It should at least be a pre-condition to moaning about immigrants taking up too much space.

Matt M
Matt M
4 months ago
Reply to  UnHerd Reader

Given that 95% of the country is in favour of reducing immigration, you would have one hell of a glut of family homes on the market if they were all forced to sell.
As far as I can tell, the only people left in England who want more immigrants are you, Kier Starmer, the Archbishop of Canterbury and Gary Lineker.

Ian Barton
Ian Barton
4 months ago
Reply to  Matt M

Worth mentioning maybe that many elderly homeowners don’t sell because they don’t want the stamp duty cost on their purchase to be removed from the inheritance they want to give their children.

T Bone
T Bone
4 months ago
Reply to  UnHerd Reader

This comment is insufferable. Yes, how exactly would you like to achieve this objective of forcing old people out of their homes that you’ve decided arent being fully utilized? Let me guess, you would support some kind of new tax on those with net worth over 500k or etc in order to “turn over” the real estate market.

Arthur King
Arthur King
4 months ago
Reply to  T Bone

It’s been floated in Canada. I have no pension and my house is all the wealth I have. My kids still live with me because housing is too expensive. I’ll be out with the other gray haired rioters “burning tires” if they ever try to enact a law like that.

UnHerd Reader
UnHerd Reader
4 months ago
Reply to  T Bone

We already have a system for assessing surplus bedrooms on those receiving housing benefits. We could perhaps enact similar for those receiving pension/heating benefits.

Alex Lekas
Alex Lekas
4 months ago
Reply to  UnHerd Reader

Or we could reduce, if not stop, the ongoing flow of illegals with unknown skills and intentions.

UnHerd Reader
UnHerd Reader
4 months ago
Reply to  Alex Lekas

Honest question: Illegal, unskilled workers have no money and earn rock bottom wages. How do they affect home prices that are far too expensive for them to purchase?
—Kimberly

Damon Hager
Damon Hager
4 months ago
Reply to  UnHerd Reader

Well, unless they’re all living in the streets, they must be in accommodation somewhere. Even if they’re concentrated in the cheaper end of the rental sector, that still contributes to the accommodation shortage, and this will drive up property prices either directly or indirectly.
BTW, it’s not racist to believe that massive, annual net immigration is unsustainable. I’m no bigot, I assure you.

j watson
j watson
4 months ago
Reply to  Damon Hager

The more appalling end of the rental market is where many migrants will be – multi-occupied and largely voice-less to grumble. It’s not where young middle class folks are being priced out of a housing future. But it is a useful scapegoat for those wishing to deflect from the fundamental problems in how we have enabled Asset accumulation to run riot to the benefit of the more wealthy. And I’m not talking about the elderly person in a large house now worth a million. We leave them alone. That’s not the issue.

j watson
j watson
4 months ago
Reply to  Matt M

I think in some situations migration level has an impact but it’s much more marginal than you think MM. Multi-occupancy much more prevalent amongst migrants. No the issue is as much affordability and the limited desire of Asset holders to put their properties on the market rather than hold as rentiers.
The inequality in Asset accumulation, which rapidly becomes a self-fufilling cycle, turbo-charged of course by £800b given away during Pandemic that will inevitably have ended up in the hands of the wealthier, much more the factor in our imbalanced Housing market. It drives prices away from the younger middle classes v quickly. Things like the inevitable desire of developers to only provide/release land/homes when profit can be maximised then on top of that.
So not entirely dismissing your point, but I think over-emphasised as compared to much bigger drivers.

Ethniciodo Rodenydo
Ethniciodo Rodenydo
4 months ago
Reply to  Matt M

Exactly. What the UK urgently needs is a circa 60% fall in house prices

A D Kent
A D Kent
4 months ago

“If so, it would amount to a regime change in what has been one of the economy’s most reliable money-making segments.”

I think if you replace money-making with debt-accumulation the statement would be more relevant to the trajectory of ‘our’ economy over the last half century

Arthur King
Arthur King
4 months ago

Canada is the worst in the G7 for housing due to the government ignoring experts who warned that supply was far behind demand. Views on immigration have turned negative due widespread suffering of people who can no longer afford housing costs. Canada is now a disaster for younger people without family wealth.

chris sullivan
chris sullivan
4 months ago
Reply to  Arthur King

NZ as well – lots of smart young folk feel no choice but moving to Australia – but gosh it is hot !

Billy Bob
Billy Bob
4 months ago
Reply to  chris sullivan

It’s the wages that entice people to Australia, the cities over there are usually just as expensive as NZ but the wages are much higher

Samuel Ross
Samuel Ross
4 months ago

More demand, stagnant supply – has anyone else read ‘The Wealth of Nations’, by Adam Smith? More people, less stuff – demand rises. Gosh!

Christine Thomas
Christine Thomas
4 months ago
Reply to  Samuel Ross

Innit!

laurence scaduto
laurence scaduto
4 months ago
Reply to  Samuel Ross

“The Wealth of Nations” was written more than two-hundred years ago, when capitalism was very different than it is now. Since then the capital holders have learned many ways to game the system so as to remove any chance and guarantee their profits. It is no longer a game of risks. The law of supply and demand has been turned into “Heads, I win; tails, you lose”.
Here in Brooklyn huge towers have been sprouting like corn, everywhere you look. It’s been going on for 15 or twenty years; block after block of lovely old homes knocked down, hideous, inhuman towers rise. And yet nothing has even dented the frenzied rise in all prices; rentals or purchases, even in neighborhoods that the developers haven’t gotten to yet.
Does the author not realize the harm that housing prices are causing to our societies and our families?

Billy Bob
Billy Bob
4 months ago

I hope house prices collapse. It’s a stain on many countries when full time workers can’t afford to buy a basic family home

John Riordan
John Riordan
4 months ago
Reply to  Billy Bob

A collapse would also bankrupt millions of full time workers who saved up for a deposit and then leveraged the biggest mortgage they could manage in order to buy a house.

A collapse is not the solution. A stagnation of house prices because of gradually increasing supply is the solution.

Ian Barton
Ian Barton
4 months ago
Reply to  John Riordan

… if also combined with reducing demand.

j watson
j watson
4 months ago

Author displays his bias by making v clear he thinks house price rises a sign of a good economy. When in fact what it is is a sign of an imbalanced economy with growing inequality on it’s way to ‘hell in a handcart’. And rising inequality here isn’t a moral issue, it’s a fundamental economic inefficiency.
In the UK the average House price in London/SE is c£450k. (Cheaper in other places but where are the jobs!) To get a mortgage for that you need to be earning £110-120k and have sizeable deposit. Mummy and Daddy might be able to help some, but many will just see a decent home of their own continuing to disappear over the horizon. Any drop in interest rates will also likely have investors switch from Savings to Housing again and those who’ve already ‘accumulated’ will further drive up prices.
This imbalance will continue until we change the way we tax asset investment as opposed to real jobs, goods and services creation investment. The position now in the UK is with quickening pace we are becoming even more unequal and our Housing and Asset fixation market has much to do with it.
No doubt somebody will look to scapegoat immigrants, and whilst supply/demand is imbalanced and not aided by poorly planned migration it’s a bit of a smokescreen for those with Assets who benefit to hide behind. The irony that we aren’t giving our young a start in life such that they can have slightly bigger families, and thus perhaps wean us more off migration reliance, seems entirely lost on these numpties…or are they well aware of this and just malign?.

R Wright
R Wright
4 months ago
Reply to  j watson

When i gross numbers 1.2 million inmigrants joined the population, most of them moving to the south-east, I dont believe it is marginal. The tax system is far less than important and is the real smokescreen.

j watson
j watson
4 months ago
Reply to  R Wright

Think your last sentence a bit unclear RW, but basically you think migration more the issue. I’m not suggesting unplanned without consideration of impact on services not an issue, but I think the Housing market much more driven by Asset owning incentives in the UK economy. Your numbers are also gross and not net, but regardless recent year or two been historically high and under Home Secs anti-large migration. Remarkable paradox.

R Wright
R Wright
4 months ago

No mention of migration. A worthless article.

Bryan Dale
Bryan Dale
4 months ago

Wage gains will gradually compensate for higher interest costs, but not all buyers are equally sensitive to interest rates. I’ve seen a lot of investors buying property to rent out and with a tight rental markets there’s plenty of demand there.