In England, buying a home is no longer the straightforward route to wealth creation it once was, with the average property now worth less in real terms than it was two decades ago.

As reported by The Telegraph, the analysis found that the typical English home sold for £293,262 in June, and once adjusted for inflation, that is below the £296,179 average recorded in July this year.

These figures demonstrate how sharply inflation has eaten into property gains, even though homes continue to command considerably higher prices in cash terms.

According to official data from Hamptons, house prices are also £47,522 lower in real terms than they were at the height of the market in June 2021.

Felix Schmidt, Senior Economist at Berenberg, said that “the times when investing in a house was a no-brainer are over”.

Higher rates

A combination of expensive mortgages and weak growth in real incomes has made it increasingly difficult for prospective buyers to afford homes, and with fewer people able to compete for properties, sellers have also found it harder to push up asking prices.

Meanwhile, the high inflation seen following the pandemic, alongside the economic effects of the wars in Ukraine and Iran, has reduced the purchasing power of money and eroded the value of previous house-price gains.

David Fell, Senior Analyst at Hamptons, stated that although most homeowners had not seen their properties fall in cash value, inflation had substantially reduced those gains. “Inflation has eroded previous gains, leaving house prices across much of southern England below their inflation-adjusted peak”, he continued.

Paul Cheshire, Emeritus Professor at the London School of Economics and a former government adviser, went further, arguing that property should not necessarily be viewed as an investment asset.

“Houses are not in any decent sense assets. They are certainly not investment assets”, he added, describing the belief that they are as “a bit of self-deception”.

A contrast

Data from the OECD shows that UK house prices increased by around 300 percent above inflation between 1982 and today, the highest real-terms growth among the G7.

By comparison, Italy recorded an increase of only 11 percent over the same period.

However, that long-running growth has now effectively stalled, with UK house prices rising by 2 percent in June, but that was still below the 2.9 percent rate of inflation.

“What changed was the bloody UK economy”, Cheshire commented. “We had a crash in 2008, and the main thing is that real incomes haven’t risen.”

The lack of real house-price growth is particularly significant because of the role property wealth plays in household spending. When the value of a home rises, owners may feel more financially secure and can potentially borrow more against their property.

A sustained fall in real values can have the opposite effect, creating what economists describe as a “reverse wealth effect”.

“If your wealth is not growing as fast as before, you will eventually also consume less”, Schmidt explained, as homeowners whose wealth was no longer increasing as quickly could become more cautious about spending.

Inflated regions

The decline in real property values is not confined to England, with every region of the UK experiencing falls when inflation is taken into account, as the highest reductions have been concentrated in southern England.

London has seen one of the sharpest declines, as the average home sold for £553,870 in June, but its value is now £168,000 below the city’s 2017 peak in today’s money, representing a 23 percent fall in real terms over more than nine years, leaving property values comparable with where they stood in 2007 after adjusting for inflation.

The South East has also recorded a substantial real-terms decline, with the average home sold for £380,380 in June, around £78,000 below its inflation-adjusted peak five years earlier.

Furthermore, average South West property values changed hands for £304,562 in June, which in real terms is roughly equivalent to prices last seen in May 2004.

These figures suggest that while homeowners may still see larger numbers attached to their properties than they did years ago, the underlying purchasing power of those homes has not kept pace with inflation.