House prices have been on a downward trajectory since they peaked last year, with property values now thought to have fallen more than 5pc.
At first glance, the drop seems small – but when inflation is taken into account, the drop is far greater.
In fact, property prices may have fallen as much as 14.5pc according to Capital Economics. The research consultancy is forecasting a peak-to-trough fall of 20.8pc in “real terms”.
Neal Hudson, of analysts BuiltPlace, said high inflation and rising wages “have done the larger part of the lifting of the price correction we’ve seen so far”.
He said: “With higher interest rates we need to see prices fall relative to earnings. That can happen two ways: through prices falling or earnings rising.”
Mr Hudson said high wages, which are a key contributor to high inflation, have prevented house prices from falling significantly so far in nominal terms.
Rising interest rates – and therefore mortgage rates – typically push down house prices because they limit how much people can borrow.
But record pay growth in the past year has helped people increase their buying power and helped fuel stubbornly high inflation – what is known as a “wage-price spiral”.
Mr Hudson said house price falls “always take a long time to feed through”.
In the first year of the house price downturn that began in 2007, property values fell 18.3pc in real terms in the first year, and 5.1pc in nominal terms. The total peak-to-trough fall ended up being 22.6pc in real terms and 19.4pc in nominal terms, according to Capital Economics.
Richard Donnell, research director at property website Zoopla, said he expects “we’ll see similar sized real house price falls” in the coming years as during the last downturn.
He said interest rates are expected to remain high, which will drag down house prices.
Mr Donnell said: “It’s looking more likely that mortgage rates will be above 5pc for a decent part of this autumn. Mortgage rates starting with a five equals falling house prices.”
The current house price correction may be more like the two Britain had in the 1970s, Hudson said.
“Back then nominal prices didn’t fall at all, because inflation was even higher, but real prices did fall and there were economic consequences in the housing market,” he said. “This time around we’ve got a little bit of both: we’ve got some nominal price fall so far and fairly severe real price correction.”
The limits of house price data
House price indices used to calculate house price falls also have limitations which can make for a rosier picture than what is happening on the ground.
Nationwide and Halifax produce two monthly indices on prices paid when mortgages are taken out – but they only use their customer base so this is limited.
Rightmove, the property website, puts out a house price index of asking prices, but Emma Fildes, a property adviser and buying agent at Brick Weaver, said this index “means absolutely nothing”.
She said some properties are “ridiculously priced” which gives buyers a false perception that they are getting a great deal when they get a discount.
Asking prices show what sellers think their properties are worth rather than what they are actually being sold for. They have only dropped 0.4pc in the last year, according to Rightmove.
Mr Hopper said many sellers are more optimistic than buyers about what constitutes a “fair market value” at the moment.
Mr Hudson said Nationwide’s index tends to be less volatile and many experts said they consider it to be a leading indicator.
The Office for National Statistics has a more comprehensive dataset across the whole residential market but it lags months behind the mortgage lenders’ indices because it monitors prices when sales are completed, which can take a long time after they are agreed.
The ONS’ house price index shows house prices have risen 1.7pc in the last year.
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The strength of cash buyers
Cash buyers are not included in the Nationwide or Halifax indices but are currently getting bigger discounts.
Many sellers have become wary of chains breaking down as mortgage rates rise and some buyers find they cannot borrow as much as they initially expected.
Jonathan Hopper, of buying agents Garrington Property Finders, said: “Cash buyers are out and active but they know they’re a rare breed and expect to be treated accordingly.
“If you’re offering cash and simplicity and uncertainty for a seller, they are flexing their muscles on looking for significant discounts.”
Discounts that do not show up in the data
New builds are also being discounted in ways that do not show up in headline house price figures.
Mr Hopper said developers can be reluctant to discount prices for new build properties – so they have been offering other financial incentives.
It is becoming more common to see developers giving buyers money towards the deposit or mortgage repayments rather than applying such discounts directly to the sale price.
When one new build drops in price in a given development it usually means a cut for all of them. This is because surveyors use the price set by one new build to determine the value of the others.
Mr Hopper said: “There’s a growing awareness that the big issue is affordability. And the elephant in the room is the fact that the product they’re trying to sell is arguably overpriced relative to the equivalent used products in the resale market.
“They’re trying to preserve those prices at all costs, and offering a basket of goodies to try and subsidise the price that somebody’s paying. But ultimately, the price that they’re paying isn’t necessarily reflective of true market conditions at the moment.”