The media have spent a lot time in the last few weeks talking about UK house prices. I understand why. It’s high profile, especially given the undersupply of housing in key areas and the number of boosts to the housing market that government has given in the last couple of years (FirstBuy, Get Britain Building, Build Now Pay Later, NewBuy, Funding for Lending, Build to Rent, etc.).
The problem is that the UK average is highly distorted by the regional variations.
Looking at August’s release of ONS house prices, in June UK house prices were 3.1% higher than a year earlier and were 9.4% higher than at the pre-recession peak.
But look what happens at the regional level.
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House prices in London were 8.1% higher than a year ago and a staggering 21.3% higher than pre-recession peak.
At the other end of the scale, house prices in Northern Ireland in June were 0.4% lower than a year ago but were an even more staggering 48% lower than at the pre-recession peak.
I chose the two extremes to illustrate the point but the majority of regions have endured declines in house prices since the pre-recession peak. As a disproportional amount of transactions, however, have occurred in London, the South East and East of England, this has pushed up the average.
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What to make of it? Well, firstly, I would ignore the UK average and look at the regional house prices. Secondly, the South East and East of England are heavily distorted by the London-effect (and London itself is distorted given the influx of international finance (e.g.; in 2012, 73% of new homes in Central London were purchased by people from outside the UK).
On the other hand, Northern Ireland is heavily distorted by the problems affecting the Republic of Ireland, where the peak to trough house price falls are even worse. Thirdly, house prices in Scotland are boosted by oil and gas revenues, which have particularly raised prices in Aberdeen.