In Real Terms UK Property Has Fallen 25% Since The 2007 Market Peak

In nominal terms the price of the average UK home has only fallen 10.5% since peaking in Q3 2007 at £184,131. In real terms however, i.e. adjusted for inflation (RPI), the price of the average UK home has fallen 25%.

The chart below shows average UK house prices in nominal terms, and adjusted for both the CPI and RPI inflation rates.

Average UK House Prices Q1 1992 to Q4 2011 (nominal & inflation adjusted data) Notes: Property price data from Nationwide House Price Index. Inflation data from the ONS.

In an environment of high inflation the nominal value of things is much less important than their value adjusted for inflation, i.e. adjusted for the reduced purchasing power of our money.

Few things illustrate this better than the relationship between UK property and gold. Since the peak in 2007 the value of an average home in pound terms has fallen from £184,131 to £164,785, a fall of 10.5%. However, when measured in terms of real money, i.e. gold, the average UK home has lost 56.5% of its value.

The reality is that the governments policy of financial repression is hear to stay, and as a result I expect the real value of property to continue to fall.

In addition to the fact that an investment in UK property is being eroded by inflation, there remains the risk (read certainty) posed by higher interest rates. When the buyers of Britain’s debt grasp the true size of our debt burden they will stop turning up to the auctions. This will send bond yields soaring (just as it did in the PIIG countries) and will quickly bring about higher rates for mortgage holders. This event will likely be the pin that finally bursts Britain’s property bubble.

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