It's carnage in the housing market
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Forget about making money in the current volatile environment. The best most of us can hope for is wealth preservation.
With the global equity markets facing never-ending turmoil, mounting sovereign debt fears and rock-bottom interest rates, savers and investors have been having a torrid time. Almost every kind of asset has been going south.
Weirdly however, the extent of the carnage in the housing market has failed to grab the headlines, perhaps because most commentators live in the handful of booming elite central London locations that have bucked the rest of the UK trend. It is not just the decline in nominal terms that is scary: the average British home is worth £163,981 today, down 19.9 per cent from the 2007 peak of £199,612, according to the Halifax.
To that decline should be added the loss of value caused by general inflation and the pound's diminishing purchasing power. Retail prices have jumped 13.5 per cent during that time; in total, therefore, the Halifax numbers suggest that house prices are down by around a third in real terms.
In cash terms, the average UK house is back to where it was in June 2005. In real terms, we are probably back to early 2003 levels.
The losses are staggering. Other house price measures paint an equally dire picture. The Nationwide's figures, which show that the average UK house price is down 0.4 per cent over the past year in cash terms, suggest that the real, post-inflation crash has so far reached just 20 per cent. But regardless of which statistics you prefer, the lesson is that bricks and mortar have lost a great deal of their value, with significantly more to come over the next two or three years.
The real loss to homeowners is even greater: billions are poured into the housing stock every year to refurbish or extend properties. Transactions are expensive; stamp duty can be crippling. Against that, the real value of mortgages is being eroded; homeowners with the largest mortgages are losing the least from the crash.
Mortgage debt is a partial hedge against inflation. Interest bills are also down, often substantially; rents are surging and can provide a good income. But house prices remain expensive compared with average incomes, and with most mortgages requiring higher deposits and imposing far lower loan to value ratios, prices are bound to fall further, especially in real terms.
It's all good news for first time buyers frozen out of the market – but those relying on their homes to fund their retirement or build their wealth face an intensifying disaster.
Allister Heath is editor of City A.M.