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FOOL'S EYE VIEW
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In a recent article, we commented on the tendency (at least in recent years) for UK house prices to rise and fall in a "boom and bust" fashion. Not everyone agreed with our comments! However, the data we analysed, from the Halifax (LSE: HBOS) House Price Index, only goes back as far as the start of 1983. The problem with studying data which goes back only 20 years is that most of us have mortgages for 25 years or more. Hence, a 20-year view doesn't give us the whole picture over the typical home-buying cycle. In order to improve the study, I've turned to Nationwide Building Society's historical House Price Data. This goes back a further nine years, giving a 29-year view overall (from 1973 to 2002). So, after plugging Nationwide's data into a spreadsheet and crunching some numbers, here's what emerged (these returns are not adjusted for inflation, which will reduce overall results in most years): Taking a one-year view (29 periods in total) Property prices rose 25 times out of 29 (approximately six years out of every seven). The five best one-year returns were in: So, despite the widely held belief that house prices grew most rapidly in this new millennium and the late 1980s, 1977-79 included two strong years. If you know any homeowners in their mid- to late-fifties and onwards, ask them if they recall this particular bubble (and the equally high inflation of the same era)! The five worst periods were: Note that prices have fallen in just four years since 1973. The best winning streak was between 1973 and 1989 (16 consecutive years of positive returns). The worst losing streak was in the three years from 1989 to 1992 (for an overall fall of 18.4%) Taking a five-year view (25 periods) Prices rose 22 times out of 25 (around eight times out of nine). The best five-year returns were in: Again, the best five-year returns for domestic property are clustered around the late 1970s and early 1980s (a period of high inflation generally). The best recent result came in 1997-2002 (87.5%). There were three consecutive periods of five-year negative returns: 1988-93 and the following two periods. At the worst point, buying at the end of 1989 and selling five years later, you would have lost 15.3% of your purchase price. The best compound annual return over five years was 16.6%; the worst was -3.3%. Taking a ten-year view (twenty periods) Prices rose all twenty times. The best ten-year returns were in: Those buying between 1974 and 1978 and selling ten years later did spectacularly well. The best recent period was 1992-2002 (131.1%), although this may be beaten by the eagerly awaited result for 1993/2003... The best annualised return over ten years was 13%; the worst was still weakly positive at 1.5%. Taking a twenty-five-year view (only five periods) Prices rose all five times. Returns ranged between 578.9% (1973-1998) and 781.6% (1977-2002). The range of annual returns is fairly narrow and stable: just 8% at worst and 9.1% at best. Over the whole 29 years from 1973 to 2002, Nationwide's data shows that property has returned 1087% - capital growth equal to 8.9% a year. However, if you are considering property as an investment, as landlords do, you need to factor in income as well as capital growth. Long-term rental incomes of, say, 3% to 4% a year would boost overall returns into the low teens for property investors, which compares favourably with other investments. According to the CSFB Equity-Gilt Study, which takes both capital growth and dividend income into account, the UK stock market has returned around 14.2% a year over the same 29-year period to 2002, outperforming property investing by perhaps a couple of percentage points a year (but an extra 2% a year creates a far bigger pot over 29 years). However, a glance at the CSFB data since 1945 reveals that annualised stock-market returns have ranged between 9.4% and 16.1% over 30 years, a far greater range than the above results for property. This may suggest that, at least in post-war Britain, property has produced good long-term returns with lower long-term volatility than the UK stock market. However, with property already our biggest asset, it makes sense to diversify by holding shares and cash as well. That way, if house prices do turn sour, we might not end up with egg all over our faces! More: Homebuying and Mortgages Centre | Property - Markets and Trends and Property Investing - Practical discussion boards The author has a beneficial interest in HBOS shares and owns part of a house (his wife and mortgage lender own the rest.)