Inflation. Ever present. Oft-forgotten

Keeping track of inflation is tedious but imperative; much like the confusing use of gendered nouns in French.?Case in point. A few days ago, an article appeared in the Property section of the Guardian. The headline was not excessively alarmist:?

UK house prices fall unexpectedly for the second month in a row

The journalists (Jack Simpson and Rupert Jones) quoted an unnamed economist as saying that “…two [consecutive] month-to-month falls in the closely watched [house price] index starts to look like a trend…”.

In the Paleolithic era, when I studied economics, I too would have preferred to remain anonymous if making such inane statements.?Two months is a blip and not a cause for panic.

To put this “trend” in perspective, Messrs Simpson and Jones noted that a typical UK home is now worth ￡11,700 less than it was in August 2022, weeks before Liz Truss’s disastrous mini-budget prompted financial chaos.

Losing eleven thousand quid is no joke but the truth is much worse than that. House prices fell in nominal terms while money fell in value at an historic rate. If striving for click-bait, taking inflation into account would deliver a more apocalyptic headline:?

UK house prices have plunged 10% since the lamentable Liz Truss mini budget. ?That's worse than the property price bust of 2008 ??

It takes decades to buy a home – the whole of your working life. You can't ignore inflation for that long. Double-digit inflation is rare but not unheard of.? You can expect the Bank of England to slam on the brakes once in a while. Forcing prices down is the whole point. We are in one of those "once in a while" moments right now. The brakes have been applied. Far from being unexpected, falling house prices are an explicit goal of monetary policy; a feature, not a bug.

Let's go old school

When I went to high school in Western Australia, the word 'unreal' meant something like terrific or fabulous. The word 'bonza' was on its way out back then. Later, when I studied economics in Canberra, they taught me that 'real' means adjusted for inflation whereas 'unreal' means a number or concept that ignores the fact that money loses value over time.

Inflation is integrally bound up in our lives. The natives get restless if their earnings rise but don't keep pace with the cost of living. When inflation is high, the economy can be spanking along nicely, in nominal terms, but you’re still in a recession. That's why the Bank of England is right to worry.

Here's why price changes matter

House prices fell by a mere 7.5% in real terms in 2009, far less than we are experiencing today, and people are still whingeing about it.? The potential for such a vertiginous plunge remains the main reason why (sixteen years later) banks won’t lend without a deposit.? This excessive adherence to the cult of collateral locks millions of Guardian readers out of homeownership.? As you've heard me argue many times, banks (almost) never foreclose so borrowers (almost) always build equity over time. Insisting on so much early collateral does very little for the banks but causes a lot of damage for the broader society.

Messrs Simpson and Jones should celebrate a long-term fall in house prices. The time-honoured tradition of locking Guardian readers out of ownership denies them the opportunity to pass wealth on to their children. These endemic problems are not headline grabbers but since when did the Guardian stand for grabbing headlines?

A local perspective on pricing is important.?

If you had foolishly bought a "typical" home at the peak in 2008, by now it would have risen by a paltry annual average rate of 1.8% in real terms.? If you had waited for the balloon to pop, cleverly timed the market, and bought at the nadir in 2009, you would have enjoyed a spectacular 2.5% average annual real growth.

Waiting for house price bubbles to pop sounds sensible but how many of us are that clever? Is it really so surprising that a mature economy might amble along at around 2% dragging house prices and rents along with it?

These broad-brush national numbers are pretty boring. Few truths are uniformly distributed in such a diverse country.? Nobody buys a home in the U.K. in the expectation of profit. Yes, they buy in expectation of a profit but, my point is geographically, nobody buys in England, Scotland, or Wales for that matter.? People buy homes in Aberdeen, Belfast, Cardiff, Doncaster, Exmouth, Farringdon, Glasgow, Halifax, Ipswich and so forth. And people who live in those towns would scoff, rightly, that yet more local nuance is required.

Norwich NR2 is not Norwich NR3, if you care about the Golden Triangle. The Westway is a hard demarcation line if you live in Notting Hill.

A median-valued home in the London Borough of Waltham Forest was worth nine times local median income in 2008.? That ratio has since risen to more than sixteen times local median income.? Since banks are awfully reluctant to lend much more than four times income – irrespective of locality – the hapless aspiring homeowner in that borough would have needed to find a deposit equal to five times their income in 2008. Today, they need to search between the sofa cushions to find about twelve times their income, which is jolly hard, unless they had the foresight to be born into a wealthy family with capacious velour sofas.

Meanwhile, up north in Durham, a median-valued home was worth around five times income in 2008.? That ratio has since fallen to just over four times local median income.?This calamity helps ordinary Guardian readers to pop into their local building society and emerge with a loan sufficient to buy a home of local median value.*?

These ratios reflect local house price inflation

Dividing one nominal number (house prices) by another (household income) is one of many ways to monitor changes in local spending power. At any one point in time, property and income are real phenomena and can be compared to each other over time, even if money has a disturbing habit of losing value over time.

Arguably, local house price-to-income ratios are a more robust measures of the cost of living than national metrics, like the consumer price index. I would urge young journalists to do this work or, at the very least, to be wary of expert economists who do not.

Tired and tested nationwide approaches to affordability

When buying a house, there are usually three parties' needs to satisfy if you want to get a deal done. First, the bank fixes a mortgage rate based on national indicia of the cost of funds (base rates, swap rates, corporate bond yields, and the like). Next, the vendor fixes an asking price in line with properties of that type locally.

Finally, the buyer (usually a family with no trouble renting locally) tries to stretch out the term of the loan to find a way – any damn way – to finance a loan sufficient to buy a home remotely comparable to the one they currently occupy.

To square the circle, the borrower has to commit to paying more every month in order to borrow more. Ironically, this formula forces many to compromise on the location, quality or suitability of their new home – even those who had no trouble renting locally. When there's something strange in your neighbourhood, who you gonna call?

Our approach is more customer-centric

We deal with locality and affordability in a rather cheeky way. We ask applicants where they would like to live and how much they feel comfortable paying. People who can afford to rent locally can afford to buy locally. Get it? Next, we use observable local rental yields as the pricing basis for our daysrent? purchase plans – et voilà – our search engine maps out homes that people with locally relevant income can buy that are "comparable in value" to those they can afford to rent locally.

Blink and you'll miss the innovation in a fruitless search for a million lines of code

The word "comparable" is shorthand for our pricing margins. If you change your margins to suit local conditions you can anchor the applicant's monthly budget and flex the length of the pathway to ownership.

It's FinTech, Jim. But not as we know it.

In 1997, it was commonplace for people to take out twenty-five-year mortgages.? Those who bought in Durham would own outright by now. True, their homes would have drifted down in value by 2% per annum in real terms but is that so bad? Those homes would be worth around ￡120,000, which won't buy much in Norflundun. It won't buy much in Sarflundun either, but it's better than a poke in the eye with a burnt stick, as they say down under. Eeking out the state pension for ten, fifteen, twenty years in retirement while continuing to pay rent is brutal.

By contrast, aspiring home buyers who lacked the wherewithal to buy in Waltham Forrest would have seen their rents rise at an average annual rate of 5.8% in real terms, assuming rents kept pace with the relentless rise in the value of someone else's home in their neighbourhood.?

Every telescope has two lenses, neither of which do you much good if someone pokes you in the eye with a burnt stick.

People affected by these issues should feel free to reach out.

Ike Udechuku | Cofounder | CEO | The Pathway Club

*These conclusions are based on freely available public data that are not hard to come by for an economist with a premium subscription to Google.