Project Fear doesn’t get any more sensible. This week we learned that Brexit will apparently lead to a rise in dogging as lorry drivers get caught up in long tailbacks in Kent. And then came the cataclysmic news that George Osborne has warned us about all along – that house prices have ground to a halt. According to the latest instalment of the Halifax House Price Index prices have fallen by 0.4 percent in the last month, with the annual rate of increase of 1.1 percent. Predictably enough, the Guardian and BBC both carried stories putting it down to “Brexit uncertainty”.
There are two obvious questions here, before we gather our tin hats: firstly, is the fall in house price inflation really down to Brexit, and secondly is it actually a problem? To deal with the first, the answer is possibly. Markets run on sentiment, and Brexit is one ingredient of a very large pot of factors influencing how people see their financial futures. But there are more fundamental factors involved in the decisions of whether or not to buy a property, such as: how much money have I got coming in and how confident am I that it will keep coming in? On both counts, sentiment deserves to be high. Real wages are growing at their fastest rate this decade, and unemployment is at its lowest rate in 45 years. If ever there was a time when people should feel secure in their jobs it is now.
The answer to the second question – does a slowdown in house price inflation matter – the answer, unless you are a speculator hoping for a quick return on your money, is a pretty unqualified no. Excessive house price inflation has been a curse afflicting Britain for much of the past half century. For the rest of the time the curse was collapsing house prices. Decades of house prices rising raster than wages have resulted in a situation where ordinary people on ordinary salaries struggle to afford a decent home. House price inflation has prevented labour mobility, distorted the economy and added to a sense of intergenerational unfairness – young people can see that they cannot afford the homes that their parents bought at their age, even if they are better off in most other respects.
Yet collapsing house prices are not much better. A falling market traps people in negative equity and, as we saw in the 2008/09 crisis, can destabilise banks as the assets on which mortgages are secured become worth less than the loans themselves. The kindest way to sort out the problem would be for a couple of decades of stable house prices. That would mean prices falling in real terms – assuming we have modest inflation in other parts of the economy – but not undermining loans. After all, economists are generally agreed that modest general inflation is best for the economy. So why shouldn’t that hold for house price inflation, too?
We have a long way to go yet until property feels affordable, but the drop in house price inflation to just over one percent is a good start. Don’t expect, however, to read headlines praising Brexit for this thoroughly positive state of affairs.