After years of watching homeownership slip further away, it can be tempting for generation rent to welcome the news of a home price slowdown with open arms. But it would be premature to grab the champagne. Even if home prices continue to fall, the potential benefits will almost certainly be offset by other economic forces. There are also good reasons to treat these data with caution. The average price fell by just £365 in July – or 0.1% month-on-month – and still remains more than £30,000 higher than the same period last year. The figure also only reflects data from one lender and represents a UK-wide average of prices. Beneath the headlines there are still growing signs that a worsening economic outlook is affecting the UK’s most beloved asset class. Over the past decade, a combination of deliberate government policies, plummeting interest rates and £895bn of quantitative easing have helped push house prices to record highs. During the Covid-19 pandemic, another unexpected dose of adrenaline was injected into the housing market as the rise of telecommuting, newly accumulated savings and stamp duty cuts sparked a ‘race for space’. The conditions that fueled this relentless rise are beginning to unravel. Last week the Bank of England raised its key interest rate to 1.75% – a 13-year high. Many economists expect further interest rate hikes in the coming months. Central banks around the world have turned their backs on quantitative easing and are now embracing “quantitative tightening,” shrinking their balance sheets after a decade of dramatic expansion. The result was a significant and sudden slowdown in housing market activity. The number of mortgage approvals has fallen for the past five consecutive months, and home transactions recently fell by 55% compared to the same period last year. For homeowners, the slowdown in the housing market will likely put additional pressure on household finances at a time when budgets are already stretched. According to trade body UK Finance, around 2 million homeowners with variable or tracker mortgages will see their monthly payments rise automatically. Another 1.8 million households on fixed rate mortgage deals due to expire next year face an extra £2,664 a year on average. The UK’s economic picture is likely to make it harder, not easier, for members of the renting generation to buy a home. Britain is poised to enter recession later this year. Households experience a real-time wage cut of almost 8% on average. For low-income households, the pressure on living standards will be significantly higher. This erosion of household income will make it harder to save for a deposit, which remains the single biggest barrier to home ownership. Banks have already started to tighten lending criteria and withdraw riskier mortgage products from the market, making it harder for first-time buyers to borrow large sums. At the same time, investors with large piles of cash can take advantage of any downturn to buy real estate cheaply. The slowdown in the property market also poses wider challenges to the UK’s economic model. The UK has long relied on a buoyant housing market to fuel growth and consumption in the absence of underlying productivity growth. Homeowners typically spend more when home prices rise and less when home prices fall. Last year £4.4bn of equity capital was converted into cash using share release products – the highest rate on record. For some of the population, double-digit growth in house prices has provided a means of building wealth and financial security at a time of stagnant wages and shrinking pensions. British political leaders have a habit of throwing money into the housing market when it suits them – from the Help to Buy scheme introduced under David Cameron to the stamp duty holiday under Boris Johnson. It is understood that a deep realignment is now underway, where the era of low consumer price inflation and high asset price inflation is being reversed. This could mean a prolonged period of stagnant house prices, where transactions fall and the market stagnates, or a more severe price shock. Either way, it will pose a huge challenge to the British model of capitalism. Weaning the UK economy from its addiction to house price inflation is, of course, imperative. Rising house prices shift wealth away from those who don’t own property to those who do. This undermines prosperity by diverting investment into the housing market instead of more productive and socially useful areas. Fixing this requires a strategic, long-term plan to transition to a new economic model while minimizing collateral damage. Hoping that fickle market forces will come to the rescue is a mistake that will almost certainly leave most people worse off.