MARKET COMMENT
How to Measure House Prices

By Rob Davies
April 4, 2001

Carburton Street, London -- Yesterday the Nationwide Building Society told us house prices rose 7.2% in the year to end March. Today the Halifax (LSE: HFX) said they rose 4.1% in the same period; bit of a difference, eh? I wonder which is right?  Although 3.1% doesn't sound a lot, the spread between the two numbers covers the base rate. Writing this ahead of the MPC meeting of the Bank of England short-term interest rates stand at 5.75%, although mortgage rates are higher than that.

So, depending on which set of data you believe, your house might be going up in value faster than your borrowings, or at less than your borrowing cost. One way adds value; the other subtracts it. Such a discrepancy in the data suggests that no one is really quite sure what is going on, but one thing remains true. The economics of repaying mortgage debt have never looked more compelling. This is an old chestnut that has been knocked around the site on more than one occasion, but the recent volatility in the stock market serves to remind us of the risks of interest-only or endowment mortgages. So the question really boils down to this.

"What do I do with my spare cash?"

To answer that, let's look at our lifetime financial goal. We want to retire with the largest possible pot of assets and the least amount of liabilities. It doesn't really matter too much what they consist of: equities or property. But reducing our liabilities increases our net worth just as much as adding more assets. So the issue then becomes which is the fastest way to achieve that. Putting a pound towards reducing a mortgage gives a guaranteed return, after tax, of 6 to 7% depending on the individual mortgage. Putting that money into equities might give you more than that in the longer term, but over the last two and half years it has given a bumpy ride for no net gain at all. A high rate taxpayer needs close to a 10% annual gain to match the guaranteed, risk-free return from paying off mortgage debt. So, it looks as if the safest way to achieve the biggest pot of net assets at retirement is paying off that debt.

Both the house price surveys point to reasons why house prices should continue rising; low unemployment and low inflation being the main ones. Paying off the mortgage doesn't stop you benefiting from that of course, but it is one of the only ways of getting a guaranteed return on your money.

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