The British housing market has defied the pessimists once again. The latest data from Nationwide shows house prices rising 0.3% in September, confounding expectations of a downturn. But beneath the surface, a deeper and more troubling trend is emerging: the 'boomerang generation' of university graduates is being forced back into the family nest, distorting demand and masking the true state of affordability.
This is not the resilience of a healthy market. It is the resilience of a market propped up by parental subsidy and cheap credit. The Bank of England may have held rates at 5.25%, but the lag effect of previous hikes is still working its way through the system. Mortgage approvals are down, and the average two-year fixed rate remains above 5.5%. The only thing holding prices up is the sheer scarcity of supply, coupled with the fact that parents are increasingly dipping into their savings to help their offspring onto the ladder.
Consider this: a recent graduate returning to live with mum and dad is not a sign of housing market strength. It is a sign of failure. Failure of the market to provide affordable rental accommodation. Failure of the planning system to build enough homes. And failure of fiscal policy to address the underlying imbalance between supply and demand.
The government's latest initiative, a 'Help to Grow' scheme for first-time buyers, is a classic case of treating symptoms rather than causes. By effectively subsidising demand, it risks pushing prices even higher, benefiting existing homeowners at the expense of the next generation. It is a political expedient, not a solution.
Meanwhile, the rental market is in crisis. Rents are rising at their fastest pace in years, driven by a perfect storm of higher mortgage costs for buy-to-let landlords, tighter regulation, and a chronic shortage of properties. In London, the average rent now exceeds £2,300 per month. For a graduate earning £30,000 a year, that represents over 60% of take-home pay. No wonder they are flocking back to the spare room at home.
The ONS consumer price inflation figures show headline CPI falling to 6.7%, but core inflation remains stubbornly high at 6.2%. This suggests that the Bank of England's medicine is not working as quickly as hoped. The labour market remains tight, with unemployment at 4.2% and wage growth still above 7%. This is feeding through into services inflation, which is precisely what the Monetary Policy Committee is trying to squash.
The market is now pricing in another rate hike in November, but the question is whether the economy can withstand further tightening. Gilt yields have risen sharply, with the 10-year yield touching 4.5%, reflecting both higher rate expectations and the market's unease about the government's fiscal position. The Chancellor's 'mini-budget' last year may have been reversed, but the damage to credibility lingers. Capital flight is a real risk if investors start to question the UK's commitment to fiscal discipline.
In this environment, the housing market is a hostage to fortune. The supposed 'resilience' is a mirage, sustained by borrowing from parents and the Bank of England's quantitative easing hangover. When the music stops, and it will stop, the correction could be brutal. The graduate returning home is not a buyer; he is a canary in the coal mine.
The bottom line: the housing market is not resilient. It is stagnant. And the longer policymakers pretend otherwise, the harder the eventual landing will be.
