In real terms, i.e. adjusted for inflation, the price of the average London home has fallen by 16% since its peak in 2007.
As I’ve mentioned before, in nominal terms London property prices have rebounded back to near their 2007 peak, however if we adjust these prices for the Retail Price Index (RPI), which is a more complete measure of inflation because it includes mortgage interest payments, we see that prices have fallen quite considerably.
Chart: Average London House Prices Q1 1992 – Q3 2011 (Real & Nominal Data)
Note: Property price data from Nationwide House Price Index. Inflation data from the ONS.
This chart shows the disparity between nominal London house prices (light blue line) and the real price once inflation is taken into account (dark blue line).
The only measure that matters
In a world of high inflation and negative real interest rates the nominal value of things quickly becomes much less relevant. In this environment the only measure that matters is the real one, i.e. the one that factors in our loss of purchasing power. And by that measure, even London property prices are falling.