FOOL'S EYE VIEW
House Prices To Treble By 2020

By James Carlisle
April 22, 2002

A study published by the Centre of Economic and Business Research has predicted that the price of the average house in the UK will treble to £300,000 over the next twenty years, equivalent to an annual growth rate of 6.2%. This sort of prediction is designed to raise eyebrows, but the truth is that there's nothing very startling about the forecast at all.

After all, over the last 20 years, house prices have nearly quadrupled, from an average of about £23,800 in 1981 to £92,500 at the end of last year, according to data from Halifax. Looking at the full set of data, from 1973, house prices have increased by an average of 8.4% per year. That amounts to a tripling on average every fourteen years or so - never mind twenty.

The figures are particularly interesting when compared with data for average earnings. The table below shows the average house prices compared to average wages.

Year      Average      Average     House price
            House     Earnings     multiple of
            Price                avg. earnings


1973      £9,767        £2,170             4.5
1976     £12,209        £3,723             3.3
1981     £23,798        £7,221             3.3
1986     £39,593       £10,626             3.7
1988     £57,245       £12,459             4.6 *
1991     £53,635       £16,051             3.3
1995     £50,930       £18,707             2.7 *
1996     £55,169       £19,381             2.8
2001     £92,533       £24,376             3.8
 
* denotes highest and lowest multiples since 1973

There have been some ups and downs but, overall, the link between house prices and average earnings has been very stable. In all, average earnings have increased by 9.0% per year since 1973, compared to the 8.4% annual growth in house prices. There's nothing very surprising about this. After all, if house prices increased much more quickly, then eventually no one would be able to afford them. If house prices lagged behind average earnings by too much, then we'd all start to 'trade up' our homes to the point where we spend about four times our income on them - because that's what we've collectively decided that we're happy to spend on our homes.

This is where the CEBR study starts to get interesting, because they're expecting house prices to increase slightly more quickly than average earnings. Over the years, average earnings growth has been pretty stable at about 2% above inflation. So, with the Bank of England's inflation target of 2.5%, you might expect long-term growth in average earnings of 4.5%. Against that, the CEBR is expecting house price growth of about 6.2%. The result would be an average house price in 2020 of a little more than 5 times average earnings - higher than at any stage in the last 30 years.

The reason for the higher expected growth is the fact that the supply of new houses is not expected to keep pace with population growth. Statistics from the Government Actuaries Department suggest that the UK population will grow from 60m in 2000 to around 64m by 2021. Longer term, the population is expected to peak at 66m in 2040, before falling back. The CEBR reckons that growth in the supply of houses will lag behind these figures and it predicts 'a chronic housing shortage, which will force average house prices up faster than average earnings'.

This seems a little alarmist. We're only talking of housing 6.7% more people (though it's fair to say that there don't seem to be enough houses to go around already). If there is expected to be a shortage, causing the average house price to rise, then you'd expect people to try to profit by building more of them. That would reduce the shortage and bringing prices back in line with historical averages. That's the free market, innit.

This link with average wages is one of the attractive features of 'real' assets like property and shares. Essentially, you receive a benefit from the asset - either rent or somewhere to live in the case of property - and that benefit maintains its value over time, relative to average earnings. Over the long-term, 'nominal' assets like cash and gilts, that are worth a defined number of pounds, have proved to be a poor substitute.

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