Inflation eating into house price growth

When looking at the real growth in a particular asset you need to take into account inflation. So, while UK house price growth has remained fairly constant over the last 12 months inflation has increased significantly. This puts a very different slant on the soothing headlines suggesting that UK property prices are maintaining their value when in real terms this is not the case.


Annual inflation in the UK ( has increased from 0.9% in October 2016 to a high of 3% in September 2017. This increase to 3% has been gradual and many expect the Bank of England to push UK interest rates higher to combat this. In effect this reflects the ever increasing cost of living in the UK taking in a basket of products which reflect, in theory, the general cost of living.

UK house price growth

When you bear in mind the Brexit vote last year, annual UK house price growth has remained relatively strong although it has fallen from 5.6% in October 2016 down to 5% in August 2017 (the latest figures available from the Office for National Statistics Growth did dip as low as 3.7% in March 2017 although it has shown improvement in the short term. This has surprised many people but the situation is perhaps not as encouraging as it seems when you take into account inflation.

Real price growth

Over the last year house price growth in real terms, taking into account inflation, has fallen from a high of 4.7% in October 2016 touching a low of 1.4% in March 2017 although it has rebounded slightly, sitting at 2.1% in August 2017. We know that UK inflation increased slightly in September 2017 and many people are expecting a reduction in annual house price growth when the figures are available. This would suggest that September 2017 has seen a slowdown in the real growth of house prices to less than 2%.

Even though the Bank of England is closely monitoring the rate of inflation this is not something which you can change overnight. We have the threat of UK interest rates ticking higher in the short to medium term but it will take some time for this to filter through the system. In the meantime it would be no surprise to see a significant drop-off in UK house price growth possibly leading to negative real growth at some point in the short term.

Real returns

It is all good and well focusing upon headline UK house price growth which has been relatively steady over the last 12 months. However, the situation is very different when you take into account the ever increasing cost of living which has risen to a 12 month high of 3%. This eats into the real returns of any asset appreciation and in this particular instance changes the picture significantly. In October 2016 annual house price growth was running at a real rate of 4.7% and while this has bounced a little up to 2.1% in August 2017, it hit a low of just 1.4% in March this year.

If Brexit negotiations do not get back on track fairly quickly many experts are forecasting another run on the pound which will increase the cost of imports and likely increase inflation. As more expenditure is funnelled into actual living expenses this will likely place more pressure on the housing market and we could see some short term weakness. There are many ifs and buts in the short to medium term which increases the risk factor and could see more investors sitting on the sidelines.

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