House prices may be falling – but the market’s underlying problems remain

Pained would-be house purchasers could be forgiven for asking “what took so long?” in response to the latest Halifax house price index.

It shows that the market is finally catching up with the economic situation being endured by people trying to get on the first rung of a ruinously expensive ladder.

Prices fell by 0.4 per cent in October versus 0.1 per cent in September, which mightn’t look like much until you consider that it marks the sharpest monthly fall recorded since the pandemic-affected February of 2021. It is also the third fall in prices recorded in four months and takes the average to a five-month low of £292,598.

Further falls are expected. Forecasts suggest that prices may be 10 per cent lower (or more) by this time next year, although predictions are hard to make with any degree of accuracy.

This correction is overdue. The post-Covid-19 explosion – in some areas the growth in prices has been positively dizzying – has reached unsustainable levels. Prices have been testing the outer limits of affordability for some time now. Even after the recent falls, the average is up by more than £22,000 during the past 12 months, and by almost £60,000 across the last three years. This represents an increase of nearly 26 per cent during a period when incomes have been flat or falling.

Mortgage rates have come down since the reversal of Trussonomics. But interest rates continue to rise. The monthly costs faced by mortgage holders are already far in excess of where they were a couple of years ago, before factoring in the impact of inflation in other areas of their budgets.

Jeremy Hunt’s forthcoming fiscal statement, with a corrosive combination of tax rises and spending cuts expected, will further moderate demand. Tax increases will tighten the squeeze on living standards and further limit the room for manoeuvre for potential buyers.

Things could rapidly get quite nasty if those who strained their budgets to buy at, or close to, the top of the market, lose their jobs. Unemployment is forecast to rise by quite a bit over the coming months. The Bank of England has predicted a near two-year recession. Even though it is thought likely to be relatively shallow, job losses will be the inevitable result.

However, even against this backdrop, the market’s underlying problem remains: there is a chronic shortage of supply, coupled with intense demand. Even with affordability at its limits, people remain desperate to buy. Renting is insecure and also expensive in many places, while many landlords are also currently seeking to impose increases on their tenants to cover their own rising costs.

The UK is still not doing enough to address this by improving the supply of housing – especially affordable housing, while making renting a more viable option as people save for a deposit.

Policy initiatives to address this shortage of supply are inevitably announced with a view to improving the situation in areas of high demand. A backlash results, with rebellious MPs driven by postbags full of angry letters from local nimbys. They cast nervous eyes at polls showing cracks in the Tories’ blue wall and cry foul.

The result is that such policy initiatives are withdrawn in favour of measures to “help people get on the housing ladder” which serve only to increase demand. There have been several of these. The stamp duty cut introduced in the disastrous Kwasi Kwarteng mini-Budget is just one more example. While Hunt reversed most of its economically unsound measures, that one remained on the books.

A correction in prices driven by troubled economic circumstances may briefly paper over the cracks. Affordability problems have dampened down demand somewhat and we may soon be giving a great deal more focus to repossessions – the inevitable result of an increase in unemployment.

But the underlying problems remain, with scant sign that anyone (yet) has much interest in addressing them. Pity the poor buyer. But pity the poor renter even more.