Are Falling House Prices a Good Thing?

The latest data on the housing market, released by Rightmove in July 2023, shows that average house prices in the UK fell by £905 (0.2%) this month. This dip comes despite average asking prices being 2.6% higher than in January and buyer demand being “resilient”, tracked at 3% higher than in July 2019.

The online real estate firm attributed the decline, in part, to the Bank of England’s spree of consecutive base rate increases. These are showing no signs of stopping, but are there any demographics who might benefit from cooling property prices?

Who benefits when house prices fall?

The short answer is not many people. For most existing homeowners not planning to buy or sell soon, you might think it wouldn’t make much difference – we expect fluctuations in house prices over time, and as long as generally things head in the right direction, a dip in the housing market surely isn’t going to have a big impact?

Not so. Homeowners are indirectly impacted by falling house prices, even if they’re not looking to move, by something known as a negative wealth effect.

For most of us our home is our main asset and if the value of this falls, it can make us feel less financially secure, causing us to save more and spend less. When house prices fall, we’re also less likely to borrow against the value of our home to release equity to spend on things like home improvements or holidays.

All of this feeds into lower economic growth, and so a cycle begins.

Are falling house prices good for first-time buyers?

Yes, first time buyers are one of the only groups who benefit from a fall in house prices, as they don’t already own a home. Any drop in house prices helps to make homeownership more affordable, and means that those for whom it was previously too expensive, may now just be able to reach that bottom rung.

Of course house prices would have to come down a long way to really become affordable for most first time buyers. Currently the average house in the UK costs over eight times the average annual salary, making it impossible for many people to even consider getting on the property ladder. Compare this to the mid-90s, when a typical home only cost four times the average annual income, and you can clearly see the problem.

Do falling house prices mean renting is cheaper?

Not usually, at least not immediately. Unfortunately we don’t tend to see much evidence of falling house prices being reflected in a fall in average rents, at least not as an instant effect.

Longer term we could see a fall in rents if house prices continue to drop, as lower prices tempt landlords to buy, thus increasing the supply of rental properties. This would be much further down the line though – renters aren’t going to be the winner here any time soon.