Inflation vs Real House Prices - House Price Inflation

Understanding Real vs Nominal House Prices

When analysing long-term trends in the housing market, it's crucial to distinguish between nominal and real house prices. Nominal prices reflect what buyers actually pay at the time of purchase — they’re influenced by inflation and changes in the purchasing power of money. Real prices, on the other hand, are adjusted for inflation to show how property values have changed in constant terms over time.

For example, a £200,000 home purchased in 2010 and a £300,000 home purchased in 2025 might appear to show a 50% rise in value. However, after adjusting for inflation, the real increase could be much smaller — or even negative — depending on the rate of consumer price growth.

Why Inflation-Adjusted House Prices Matter

Looking at house prices in real (inflation-adjusted) terms provides a clearer picture of how the housing market affects different groups over time.

Homebuyers: Real prices show whether homes are genuinely becoming more or less affordable, rather than just more expensive in cash terms.
Homeowners: Adjusting for inflation helps distinguish true wealth gains from price rises driven purely by changes in the cost of living.
Investors: Real house prices better reflect long-term investment returns once inflation erosion is taken into account.
Policymakers: Comparing house prices with inflation helps assess housing pressure relative to the wider economy and living costs.

Comparing inflation-adjusted and nominal house prices reveals periods where property values outpaced or lagged behind the broader economy. Periods of high inflation can make nominal growth appear stronger than it really is, while low-inflation environments can expose periods of genuine real appreciation.

Since 2020, UK house prices surged nominally due to supply shortages and pandemic-driven demand, but adjusting for CPI shows that much of that rise was eroded by the sharp increase in inflation during 2022–2023.

Key Takeaways

Nominal prices show the cash value; real prices reveal the true purchasing power of housing.
High inflation can mask stagnation or decline in real house prices.
Real house prices are better indicators of long-term affordability and wealth growth.
Comparing CPI with the UK HPI gives a clearer view of housing performance relative to inflation.

Data Sources

Based on the UK House Price Index (UK HPI) published by HM Land Registry and the Consumer Price Index (CPI) published by the Office for National Statistics (ONS).

How Real House Prices Are Calculated

Real house prices are calculated by adjusting the UK House Price Index using the Consumer Price Index (CPI). This removes the effect of general price inflation and allows prices from different years to be compared in constant purchasing-power terms.

In practice, nominal house prices are divided by the CPI index (rebased to a constant year), producing a series that reflects changes in housing values after accounting for inflation. CPI is used because it is the UK’s primary measure of consumer inflation published by the Office for National Statistics.

Nominal vs Real House Prices

Real (CPI-adjusted) values expressed in constant prices.

When the nominal line rises faster than the real line, house prices are increasing mainly due to inflation. Periods where real prices stagnate or fall indicate that housing has not kept pace with the cost of living, even if headline prices appear to rise.

Historical Perspective

Viewing house prices in real terms helps place major housing cycles into context:

Late 1980s boom: Rapid nominal growth was followed by a sharp real-terms correction in the early 1990s as inflation and interest rates rose.

Post-2008 period: Nominal prices recovered steadily, but real growth remained subdued for several years after the financial crisis.

2020–2023: Pandemic-era price surges were largely offset by high inflation, leading to a flattening or decline in real house prices despite record nominal values.

Frequently Asked Questions

Do UK house prices always rise faster than inflation?

No. While nominal house prices tend to rise over time, there are extended periods where real house prices stagnate or fall once inflation is taken into account.

Have UK house prices fallen in real terms?

Yes. Several periods, including the early 1990s, post-2008, and parts of 2022–2023, saw declines in real house prices despite stable or rising nominal values.

What does "constant prices" mean?

Constant prices express values in the purchasing power of a single base year, allowing meaningful comparisons across decades without inflation distorting the results.

Why use CPI instead of RPI?

CPI is the Office for National Statistics' headline inflation measure and is more consistent over time. RPI is no longer classed as a national statistic due to methodological limitations.