Why inflation will be a disaster for house prices

Inflation has soared to a new 40-year high of 9.4pc in June – and this brings a dangerous triple whammy for house prices.

Plunging real wages are hitting buyers and homeowners’ pockets just as high inflation pushes the Bank of England to raise interest rates, which when combined, has drastically reduced people’s ability to afford a mortgage. The fewer people can take out a loan, the fewer there are to buy homes.

High inflation has depressed consumer spending, meaning a recession is looming – in turn bringing a risk of rising unemployment. This triggers mortgage defaults and forces people to sell their homes, normally for less than they are worth.

The housing market slowdown has already begun. New buyer inquiries in June fell at the fastest rate recorded since 2020, when housing market shutdown, according to the Royal Institution of Chartered Surveyors, a professional body.

Andrew Wishart, of Capital Economics, a research consultancy, said: “With mortgage rates continuing to rise and the economy on the brink of recession, a fall in house prices looks inevitable.”

Here is everything you need to know.

Real pay is plunging

Inflation is steadily destroying people’s earnings. In real terms, wages have been falling since November 2021 and are now plunging at the fastest rate since records began.

From March to May, regular pay climbed by 4.3pc year-on-year, according to the Office for National Statistics. When adjusted for inflation, however, wages actually dropped 2.8pc.

By comparison, in the wake of the financial crisis in 2008, real regular pay only fell by 1.1pc and house prices later fell by 17.6pc.

A larger, 2.4pc drop in real pay came later in 2011 and a 10-month period of house price falls followed.

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