How to handle the house-price conundrum

I still remember my first place after I moved out of my parents’ house. Not because it was fancy, but because I could call it my home.

It didn’t matter that I had to walk down three flights of steps to see if the postman had been, that the peephole on the front door was lacking glass or that there was rarely hot water.

I may have been renting but it was my home and that was all that mattered.

After all, our homes are important. When we are fortunate enough to become a first time buyer and get the keys to the first property we have ownership in, we start to care about house prices because our money is involved.  Many people even plan for their home to be their retirement fund

Hearing that its value is increasing year after year can feel pretty good. Maybe we can sell up in 5 or 10 years and move to the south of France…

Hearing that its value might be going down though? That definitely wasn’t the plan. Suddenly those daydreams about croissants on the balcony and afternoon siestas are replaced by terrifying images of life on the breadline.

And with all the speculation leading up to the EU referendum that prices would indeed fall in the wake of a Brexit vote, you may have spent the past couple of months really concerned about what the impact could be on you.

So the question is, should you really be worried about a collapse in house prices?

What are you planning to use your house for?

If your answer is This is my home and I plan to live here forever, then provided you keep up with the mortgage payments you don’t really have anything to worry about. You can put your feet up and relax.

For all the talk about an impending crash, there’s one thing that frequently gets overlooked:

The price of your house only matters when you want to sell it or release money from it

That’s it.

If your answer was It’s an investment for my future. I will either release equity or sell up and downsize, then its value matters more to you. That doesn’t mean panic!

If you are considering selling at some undecided point in the future, even in the event that the worst happens and we see a fall, you’ll have plenty of time for prices to bounce back.

Also, a fall necessarily doesn’t mean you’ll lose money – prices have risen so much over the years that you could still be in profit even if the value falls.

But we’re really getting ahead of ourselves here. There hasn’t been a price crash, there may not be one, and if you are worried about one then one thing you need to remember is this:

London isn’t the UK

Much of the news of falling prices focuses on London. And that makes some sense – the capital is so expensive that falls are dramatic. Take a prediction from Savills as an example. They’ve claimed that prime central London prices could drop by 9%, a percentage big enough to strike terror into the heart of many homeowners.

Actually, though, Savills is looking at prime central London – areas where property is so expensive that a 9% drop would reduce the price by more than the cost of the UK’s average house.¹

That’s not definitely a result of the Brexit vote, either. London had turbulence in its property market last year too, with transactions down 7%.²

So scary headlines about volatility in London shouldn’t immediately spark panic unless one of those £4 million houses actually belongs to you.

Don’t believe everything you read

No doubt you already know this. Chances are you’ve even given the advice to someone else as well. But it’s our natural instinct to follow the crowd, so if we see others panicking we often start to panic ourselves.

Let’s say you have two new acquaintances, Peter and Mary.

Mary likes to spend her time with her nose buried in a book, perfecting her garden or otherwise being productive. She rarely watches TV or reads the papers, and has the opinion that if an event is big enough she will hear about it.

Peter, on the other hand, consumes a lot of media. If it’s not the news it’s social media, each providing notifications and updates directly to his phone. He frequently hears the predictions of potential damage to the economy – including house prices.

Which of the two is more likely to be panicking about the value of their house plummeting? Mary, in her serene environment, or Peter, constantly absorbing the wild speculation and predictions in the media? My money is on Peter.

It’s only by tuning in to some form of media that you hear property valuations are moving, or predicted to move, in either direction. When something unprecedented happens, it's easy to fear the worst.

Here’s the thing, though: unprecedented events have happened before. The constant talk about house prices and the economy is all currently just speculation.

But let’s say the worst happens and the prices do come down. Whenever it’s happened in the past, it has never been permanent.

This graph shows the cost of houses in real terms since 1975³. Every time prices have gone down they have come back up. It took a number of years to recover from the collapse in the early 1990s, but it did happen. And while we haven’t yet reached the peak of 2007, the overall trend of prices is clearly on the up.

Real House Prices Graph

Focusing on what we know beats speculation, every time

What we do know is that house prices will go up and down over time and it’s possible they could go down in the near future. For as long as we cannot predict the future, though, the wise thing to do is keep a sense of perspective.

History shows us, without fail, that when house prices have dropped in the past they have always risen again and become more valuable than before. And there’s no reason to think things will be any different next time.

That’s why it makes sense to see media speculation for what it is: little more than informed guesswork, at best.

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