House prices to fall this year

Michael Wagstaff • 13 April 2022

The warning signs are in the data

House prices have been about the only thing immune to the Covid-19 global pandemic. Prices have shot up due to huge demand from buyers looking for more space,  a change in lifestyle favouring seaside and countryside living and the stamp duty holiday in 2021 saving buyers thousands of pounds. There is also no doubt that many households benefited financially from working at home during lockdown which meant more money to spend on housing.

Latest figures from the Nationwide Building Society's House Price Index show that the average house price in the UK is £265,300, an increase of 21% since the start of the pandemic. In the year to March 2022, prices increased nationally by over 14% as a lack of supply combined with strong demand added further upward pressure on house prices.

But how long can this go on? At what point do rising house prices become unsustainable and start to go into reverse? For the housing market to work efficiently it needs new entrants (first time buyers) coming into the market and existing owners trading up enabling those behind them to move up the property ladder. Once prices reach such a level that the flow of buyers through the market is impeded then serious problems arise. 

There are plenty of warning signs that suggest prices will start to fall soon. The cost of living crisis and the recent rise in interest rates is obviously a big factor but the Nationwide data also reveals structural deficiencies in the market that may need to be rectified by a fall in prices : the increasing unaffordability of  housing for first time buyers and the widening price gap between different property types.

In many regions owner occupation is unaffordable. The graphic below, from Nationwide Building Society, looks at initial mortgage payments for a prospective first time buyer relative to their take home (or net) pay.

First-time buyer mortgage payment as a percentage of net income

Nationwide Building Society graphic


For the UK as a whole, on average, first-time buyers need to spend over 30% of their take home pay on a mortgage. In London it is over 50%. In the counties immediately surrounding London (known as outer metropolitan) it is over 40%. In the South East, South West and East Anglia it is over 30% of net income. These are historically high rates of unaffordability compared with the long run average.


Add to this the spiralling costs of energy and fuel and with inflation currently at 7% (but likely to reach 10%) then owner occupation quickly becomes unaffordable for potential first-time buyers in large parts of the country.


The other structural fault line in the market is that it is becoming increasingly difficult for existing owners to trade up.


The price gap between properties is widening as the graphic below shows. The average price gap between a flat and a terraced house was £12,000 prior to the pandemic. Today it is £25,000. There is a similar widening of the gap between semis and detached houses with a smaller increase between terraced and semis. These are record high price gaps.


Price gaps between different property types

Nationwide Building Society graphic


The graphic shows that it is becoming increasingly more difficult for existing owners to trade up which in turn decreases the supply of cheaper properties. Those owners currently delighting in the soaring value of their home may have a nasty shock when they find they can't actually afford to move anywhere. Of course, they could always move to a cheaper region but not everyone has the ability to do this.


Normally a lack of supply means it's a seller's market and prices increase. This is what is being experienced at the moment. However, if that supply is too expensive for buyers, thereby weakening demand, something has to give to get the market moving again.


These structural flaws in the market can only be corrected by a realignment between house prices and income. This either means that income has to go up substantially or prices have to come down. My money is on the latter.

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