House prices have seen their biggest annual fall in a decade – so what does it mean for buyers?

Prices are far too high for prospective buyers, argues James Moore. They need to fall further as getting on the housing ladder is increasingly restricted to those able to call on the Bank of Mum and Dad

Hosue prices are falling but they could do with falling further (PA)

So addicted is Britain to constantly rising house prices that the merest hint of the market going in the other direction is accompanied by hand-wringing, tooth-gnashing and predictions of doom. The release of the Nationwide Building Society’s latest house price index served serves as a case in point.

The significance of the update is that the figures show an annualised decline of 1.1 per cent. Prices have been falling month-on-month for a while now – but this is the first time this particular index has shown a fall across the course of a year since June 2020. And that, remember, was in the middle of the pandemic. This February 2023 figure actually represents the sharpest annual decline since 2012.

The release of the data was also accompanied by a profit warning from Persimmon Homes, one of the biggest developers, a company that once tried to pay its CEO a £100m bonus (reduced in the wake of an outcry) when the sun was shining on the market a few years ago.

Britain’s supine corps of institutional shareholders are probably going to take a careful look at the current executive rewards after seeing their holdings take quite the tumble. The market took a very dim view of the company predicting that completed sales could fall from last year’s near 16,000 to as low as 8,000.

In terms of Nationwide’s house price index, you have to look beyond headlines to get to the most important part. It comes courtesy of Robert Gardner, the society’s chief economist, who described the fall as “modest”. And it is. The average house price is still above a quarter of a million pounds (it came in at £257,406). Gardner, meanwhile, points out that the mortgage payments faced by a prospective first-time buyer earning an average income are still “well above the long-run average as a share of take-home pay”.

He further highlights deposit requirements that remain “prohibitively high for many”. Saving for one will be a struggle in the current economy, and particularly for those languishing in the private rental sector, where rents have been on a sharply upward curve.

Want more? An Office for National Statistics (ONS) analysis of affordability last year said full-time employees could expect to spend around 9.1 times their workplace-based annual earnings on purchasing a home, compared to 7.6 times the previous year. The next ONS affordability update is due at the end of this month. But with prices only just starting to fall on an annualised basis, even though wages have been rising (but not in real inflation-adjusted terms), that earnings multiple is likely to remain elevated.

Lenders will typically advance between 4.5 and five times earnings to a first-time buyer. The gap between the two is considerable. This explains why the Bank of Mum and Dad has become such an important factor (it has become one of Britain’s biggest lenders). Those with parents rich enough to be able to subsidise their purchases can get a leg up onto the housing ladder. The first rung is all but insurmountable for many of those without extra support.

The “property-owning democracy” beloved by the Conservative Party is thus becoming available only to the few, exacerbated by “nimby” backbenchers who frustrated planning reforms that might have made it easier to get more homes built where they are needed.

Throw in the malign impact of the cost of living crisis and it’s a wonder prices didn’t start to fall earlier. A correction has been long overdue and this one needs to go further. Of course, it isn’t all good news for the nation’s hard-pressed buyers. Numbers like those produced by Nationwide are inevitably going to have an impact on the housing market – nobody wants to sell into a falling market unless they absolutely have to.

But such figures are still a net positive. At least in the absence of anything to stimulate greater supply such as a renewed attempt at tweaking those planning rules or imposing a “use it or lose it” requirement on developers as regards to the land they hold. Which could be filled with hundreds of thousands of desperately-needed new homes. Although developers might now be inclined to sit tight until prices start to rise again with a view to keeping their shareholders happy.

Given the state of the market, that would be quite unconscionable.