In real terms, i.e. adjusted for inflation, average UK house prices have fallen by 29.9% since their peak in July 2007. This puts the price of the average home back to the level it was in September 2002.
Part of the reason these numbers from Halifax are so shocking is that we are not used to seeing house price data expressed in real, inflation adjusted terms. Most news coverage quotes the price of an average UK home as a nominal figure i.e. £161,132 (Halifax House Price Index September 2011). However when the rapid erosion of the purchasing power of the British Pound is factored in, it becomes apparent that UK home prices are falling much faster than the nominal figures we are used to hearing suggest.
Nationwide House Price Index 1975 to Present – Real & Nominal Data
This chart shows the disparity between nominal UK house prices and the real price once inflation is taken into account. The top (dark blue) line shows the real price of the average UK home from 1975 to today.
Our money is losing its purchasing power for the simple reason that the Bank of England (BoE) keeps creating more of it through QE (Quantitative Easing) which means we need more of it to buy things – including houses.
House prices, by the only measure that matters, are still falling despite the fact that the housing market is on life-support in the form of 0.5% interest rates – something that cannot last indefinitely, especially since it’s only a matter of time before it becomes apparent that the UK’s deficit reduction plan is failing and we are stripped of our AAA credit rating.