Why you shouldn’t worry about falling house prices

Recent data has been crystal clear. The trend is undeniable.

The Halifax House price index has fallen for five consecutive months. In August, prices decreased by 1.9% month on month while on an annual basis, prices have fallen 4.6%, which is the biggest annual decrease since the financial crisis of 2009. And prices in August reflect prices that were agreed months ago. That means further falls are to come. These falls should surprise nobody. Interest rates have gone from 0.1% to 5.25% in 18 months so affordability has come down sharply.

Prices always catch up with affordability in the end. But our home is not an investment. It’s where we live. When house prices were going up, could we spend this extra money? No. A home is an illiquid asset. It’s difficult to tap your equity. You can’t sell off a bathroom to take advantage of higher prices.

So just as we don’t benefit when prices go up, we don’t necessarily lose out when prices go down. If we downsize or upsize, we receive less money but the house we want to buy also costs less. We have to live somewhere!

If we bought last year then yes we could have saved some money, but we probably also managed to fix our mortgage cheaply. And negative equity (owing more than your house is worth) is rare as bank lending is much more cautious.

For first time buyers, falling prices are undoubtedly a good thing. Also for parents (otherwise known as the Bank of Mum and Dad) who are helping their children onto the housing ladder.

So let’s not obsess about house prices. Building wealth in your home is nice but it won’t help with your retirement plan.

This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

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