Chart that tells a story - inflation, mortgages and house prices

What does this show?

It illustrates nominal and real house prices over the past decade, indicating that the former have comfortably exceeded the latter - until now. Growth in consumer prices, which include the cost of renting but not buying property, fell to zero in February and stayed there in March: real house prices are now at the same level as nominal property prices.

If deflation occurs, as some are predicting, this relationship will go into reverse, with real values exceeding nominal house prices.

Where is the data from?

It is taken from the LSL Acadata house price index, a monthly measure of transactions and prices in England and Wales. It uses actual transaction prices - including by cash buyers - rather than asking prices or valuation estimates.

Deflation? Aren't house prices rising?

Yes, but at nothing like the pace of recent years in hotspots like London and the Southeast. There, prices have risen by more than 30 per cent since the financial crisis but growth has fallen off in recent months. Figures this week from the Office for National Statistics showed the annual rate of house price inflation falling to 7.2 per cent in February, down from 8.4 per cent in January and the lowest rate for more than a year. The Centre for Business and Economic Research predicts a fall in London prices of 3.6 per cent in 2015, against a rise of 1.5 per cent nationally, after years of outperformance in the capital.

What would deflation mean for me?

A short bout of deflation can encourage spending among consumers as prices drop on supermarket shelves and at the petrol pump. But in the long term it can cause big economic problems if it means people hold off from making purchases in anticipation of further price falls.

For those with mortgages, deflation is the enemy: if a property's value falls, the fixed mortgage attached to it rises as a proportion of the total value. If wages are falling as well as the cost of goods and services, borrowers have less disposable income with which to make their monthly repayments.

Inflation, by contrast, helps mortgage borrowers by eroding the size of their debt relative to the property value. It can also help when homeowners want to refinance a fixed term mortgage after the period of the fix ends, because the smaller a mortgage as a proportion of the total property value, the better will be the range of deals on offer.

The relationship may not be so beneficial when borrowers are on a lender's standard variable rate and inflation is high: interest rates are then likely to rise, pushing up monthly repayments.

Is there no upside to slower price growth?

Yes - in the short term, it is likely to mean a continuation of the record low mortgage rates currently on offer from many lenders, since the Bank of England will be reluctant to raise its base rate while these conditions persist. "Some may even sharpen the pencil a little on rates," said David Hollingworth, director of broker London & Country Mortgages.

So should I pay off my mortgage?

Now may be an ideal time to make capital repayments, as inflation plumbs the depths but wages are starting to grow again. While years of below-inflation wage growth mean there is catching up to do and wage growth may not survive a long period of deflation, workers will now feel they have more disposable income.

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