“Scary”, “terrifying” and “extremely uncertain” are just some of the words economists and experts have used in the last six months to describe to me the state of Britain’s housing market (the cost of homes hit its highest ever level last year).

Whether house prices go up, crash down, or stagnate, the housing market affects everyone in Britain, regardless of whether they own a home or not. The mortgage market is heavily linked to our national economic robustness and the stability of global financial markets.

As housing market analyst Neal Hudson told me recently: “Britain’s housing market can’t quite make up its mind about what it’s going to do.” Prices are falling but not as quickly as many economists, including Hudson, thought they might last year.

You’d be forgiven for being confused about what’s going on. There is a lot of conflicting information out there. According to the latest data from the Office for National Statistics (ONS), the average UK house price increased by 6.5 per cent in the 12 months leading up to January 2023 at an average price of £290,000, which is £17,000 more than the year before.

On the surface, that makes it sound like everything is fine but it’s important to put these figures in context.
Taking a long view, as these figures do, of annual growth last year does not tell us what’s happening right now. Interest rates remain higher than they were last year, and inflation continues to climb (to 10.4 per cent).

While it’s true that house prices are still rising in some parts of the country, if you look at what happened in January, the ONS numbers tell us that house prices, on average, have actually fallen 1.1 per cent since December. This appears to conflict with data from property website RightMove which claimed earlier this week that house prices in the UK had defied the economic “gloom” brought on by rising inflation and experienced an “average £3,000 rise”.

Though it was widely reported, RightMove’s data did not reflect the price that homes are actually sold for, which the ONS does because it tracks land registry data. Instead, it reflected asking prices. This is an important distinction: there is a huge difference between the amount that a seller would like to get for their home and what a buyer can actually afford to pay.

I regularly meet people who tell me that “even if the housing market crashes, house prices will go up because that’s just what they do” but it strikes me that we need to challenge this shaky opinion.

The reason for the confusion about the housing market is not just because asking prices are being conflated with sale prices in reports but because many people – individuals and businesses alike – do not want to confront the economic reality of slowing house price inflation, falling house prices, higher mortgage rates and rising inflation. Why? Because it means they may not make as much money on their home as they had hoped and in Britain, a country where homes have earned more than people for over a decade, making property seem like a safe investment, that is a worrying prospect.

A housing market downturn is difficult to accept for many people who have bought into the idea that housing is an investment and not a home. However, if forecasts from the Office for Budget Responsibility (OBR), which still suggest a 10 per cent fall in house prices from their all-time high in the fourth quarter of 2022, are anything to go by, the housing market may not give them much choice.

At present, sellers are in a standoff with reality and are reluctant to adjust their expectations. But the truth is that a fall in house prices is probably the best possible outcome for the housing market. It would undo the extreme inflation we saw during the pandemic and make homes a bit more affordable again.

We aren’t returning to the ultra-low interest rates experienced in the wake of the 2008 global financial crisis any time soon (if ever) and, historically, high house prices simply cannot coexist with higher mortgages rates amid inflation and wages which can’t keep up. Today the Bank of England has once again increased their base rate to 4.25 per cent meaning mortgages will get even more expensive.

British people, like British banks, have become addicted to rising house prices. I always like to point out that the Bank of England itself notes that “when house prices go up, homeowners become better off and feel more confident” which makes them spend and borrow money and keeps the world of financial services turning. That is why politicians always try to boost the housing market in troubled times with measures such as stamp duty cuts.

There is uncertainty all around right now but it’s time to face facts. Buying a home is the largest purchase most people (except those with extreme wealth) will ever make. It also usually involves taking on huge amounts of debt. We now have an opportunity to acknowledge the volatility of the housing market and ask whether encouraging people to gamble with that purchase, betting on the fact that homes will continue to become more expensive, is right.

If house prices continue to fall, pushing a number of people who bought at the top of the market into negative equity (which is where your home is worth less than you paid and you owe your mortgage lender money), it will become clear that it is, in fact, very wrong.

Vicky Spratt is i‘s housing correspondent

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