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How does the cost of living affect house pricing?

According to ONS figures, consumer prices, measured by the Consumer Prices Index (CPI), were 9% higher in April 2022 compared to April 2021 [1]. This increase represents the highest inflation rate on record. The extreme rise in CPI reflects higher consumer goods and household energy prices, with the cost of fuel and food driving many households to the brink. We are now seeing a critical situation and cost-of-living crisis last observed 40 years ago.

Many believe the rise in cost of living is likely to spread to the property market. 2021 was described as a “bumper year” for the UK housing market, where the pandemic and government’s temporary pause on stamp duty fuelled the highest number of house purchases since the pre-global financial crisis in 2007 [2]. The change to remote or flexible working arrangements also promoted the need for more space, and sparked interest in rural properties. Some predict this flurry of homebuyers will begin to taper, expecting a potential housing market crash in 2022 as the cost-of-living change is set to reduce disposable income for a large number of households. As one 2012 study demonstrated, the UK housing market is sensitive to permanent and temporary income shocks, which could indicate an imminent drop in house prices [3].

Additionally, the Russian-Ukraine war and renewed COVID lockdown in China has also impacted supply chains, leading the Bank of England (BoE) to increase the key interest rate to 0.75% in March 2022. Increases in interest rates usually translate to higher mortgage rates, which adds to the financial challenge of moving home for lots of people. The BoE has also predicted that the 9% inflation may even rise to 10% later this year, raising the key interest rate to 1%. It’s clear, rising inflation and CPI are not favourable for the property market.

However, recent figures for the UK HPI (House Pricing Index) published by the ONS seem to offer an optimistic outlook for the start of the year. They confirm year-on-year growth, with the latest figures (March, 2022) finding UK house prices were an average of £24,000 higher than the same time last year [4]. More recent figures from May 2022 published by Rightmove similarly portray a positive position for the market, reporting approximately 10% annual price growth when looking at year-on-year change, a record high average asking price, and a record low average time to find a buyer [5]. It’s important to note that Rightmove uses asking prices to calculate their data, while the ONS uses processed transactions, whereby the soon-to-be-released UK HPI by the ONS for May 2022 may be a more accurate portrayal of house prices for the month. Nevertheless, the reported figures seem to counter claims the market is in a downward slump, with some suggesting it may have in fact stabilised, creating a ‘new normal’ for higher prices. Yet the optimistic view of the double-digit annual increase on house prices should be met with caution, as the rate of annual growth is still down from previous months. This could be linked to the impact of the cost of living.

So, how will the cost of living affect house prices for the rest of 2022? It’s difficult to predict, considering the squeeze on household budgets that may prevent people from buying. However, figures still remain positive with high average asking prices.

There are also other elements that impact house prices. Given that the housing market is governed by supply and demand, the number of available properties is also a major determining factor. Generally, if the number of buyers exceeds the number of properties – as witnessed to a great extent in 2021 – the price of a house rises. Although the pandemic may have long-lasting impacts, some predict the housing market will normalise throughout 2022 as more properties become available, which may mean that asking prices don’t drop per say, but the rise in prices occurs at a slower rate. However, Chris Bloor believes that there is still a huge demand for properties at the moment, despite the impact of inflation on mortgages:

“We are noticing more properties being re-listed on Rightmove as a result of banks down-valuing properties for mortgage purposes, which leads me think that the lenders are being extra cautious at the moment. That said, the same properties are being snapped up indicating that demand is still high in the marketplace.” Chris Bloor, Director of CJ Bloor

The location and condition are also critical factors that determine a house’s price. Being close to a local school, having a ready-to-move-in house that needs no further work, and being close to public transportation can potentially push prices up, whereas houses that are in areas prone to flooding, or are too near railways or busy roads can potentially have the opposite effect. These factors are all things that may be considered in a professional house survey when assessing a house, and are mostly tangible to the cost-of-living.

Only time will tell how the cost-of-living crisis will affect house prices. Expert opinions are constantly changing; a Reuters poll conducted in February 2022 found a median of 4% for expected house price rises this year [6]. The same poll in May found an altered median of 6.5%, demonstrating how the situation is always evolving. However, it seems as though for now at least, the housing market is remaining relatively stable. Fundamentally, there are several reasons to be optimistic:

  • Recent figures show growth
  • Several factors impacting house prices are not related to the cost of living

Nevertheless, the cost of living is predicted to shake things up:

  • Higher cost of living means lower disposable income and potentially lower number of buyers
  • High inflation rates mean higher mortgage rates, which may put people off buying

References:

1) Harari, D., Francis-Devine, B., Bolton, P. and Keep, M. (May, 2022) Rising cost of living in the UK, Research briefing, https://researchbriefings.files.parliament.uk/documents/CBP-9428/CBP-9428.pdf

2) UK Finance (2022) 2021 set to be a record year for mortgage lending since financial crisis, https://www.ukfinance.org.uk/press/press-releases/2021-set-be-record-year-mortgage-lending

3) Fraser, P., Hoesli, M and McAlevey, L. (2012) House prices, disposable income and permanent and temporary shocks: The NZ, UK and US experience, Journal of European Real Estate Research, 5(1), 5-28 https://doi.org/10.1108/17539261211215987

4) ONS (2022) UK House Price Index; March 2022 https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/march2022

5) Rightmove (May, 2022) House Price Index https://www.rightmove.co.uk/news/content/uploads/2022/05/Rightmove-HPI-23rd-May-2022-Final-1.pdf

6) Cable, J. (2022) Cost of living crisis to shut the door on bumper UK house price rises, Reuters, https://www.reuters.com/world/uk/cost-living-crisis-shut-door-bumper-uk-house-price-rises-2022-05-20/