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FOOL'S EYE VIEW
This year is shaping up to be one of the most interesting in recent history for homeowners and property investors. After a long winning streak, the housing market is slowing down, and the rug may already have been pulled from under it. Still there are widely varying opinions on its future direction: in one corner, you have mortgage lenders, estate agents, surveyors and other vested interests talking up the market or predicting a gradual slowdown. In the other corner, you have several independent academics and economists predicting substantial slides to come. Who will time prove right? To be honest with you, I reached the conclusion last year that house prices could no longer continue their relentless climb. After many happy years of homeowning, I'm now renting. When I made my decision, I totally ignored other people's forecasts of the future direction of house prices. To be honest, no-one has a decent track record for predicting house prices, even one year ahead. For example, HBOS is the Goliath of mortgage lending, with lenders such as the Halifax, Bank of Scotland and Birmingham Midshires under its belt. In total, the group controls two-ninths (22%) of total mortgage debt. Despite its massive domination of this market, HBOS occasionally drops a clanger. In December 2001, the Halifax confidently predicted that the average UK house price would rise by 5% in 2002. In reality, it rose by 25.7%, which means that the Halifax was out by a factor of five. That's some crystal-ball gazing! What convinces me personally that the housing game is too risky for the time being is the massive rise in personal debt here in the UK. In the last eight years our mortgage debt has increased by 122% and our credit-card debt is up 253%, and our other non-mortgage debt is up by 110%. TOP TIP: Want to dynamite your debts? Visit our Get Out of Debt centre today! Anyway, let's take a look at those historical figures. Here's how the price of the average UK home has varied since the start of 1983, using the Halifax's figures: Over one year (21 periods) Prices rose seventeen times and fell four times. Ignoring general inflation (I mention its impact at the end), one-year returns range from 34% to -8.3%. Here are the best five and worst five years: Best: Note the amazing success of house prices so far in the 21st Century! Worst: The average return over one year comes to 8.5%, which is in line with the average since 1945. Over three years (nineteen periods) Prices rose fifteen times and fell four times, with three-year returns ranging from 75.6% to -10.3%. Here are the best five and worst five years: Best: Worst: The average return over three years comes to 27.7%, equal to 8.5% a year compounded, the same as one-year returns. TOP TIP: Fed up with paying sky-high interest rates on credit cards and personal loans? We have a deck of delightful 0% credit cards, plus the UK's cheapest personal loan! Over five years (seventeen periods) Prices rose thirteen times and fell four times, with five-year returns ranging from 107% to -10.7%. Best: As you can see, the recent boom appears twice in the top table. Worst: The average return over five years comes to 44.9%, equal to 7.7% a year compounded, which suggests that it's hard to avoid at least one bad year in five. Over ten years (twelve periods) Prices rose all twelve times, with ten-year returns ranging from 159.8% to 12%. Best: Three of the best ten-year periods come from the recent housing boom. Worst: This shows how the crash of the early Nineties depressed returns considerably. Investing in the late Eighties and selling in the late Nineties would have been the worst strategy in this study, but you'd still have made a positive return, albeit a piddling 1.1% a year from 1988 to 1998! The average return over ten years comes to 68.7%, equal to 5.4% a year compounded there's no straight ten-year growth period in this study. TOP TIP: Remortgaging could save you upwards of £1,500 a year, so check out the handsome home loans in our Mortgage centre today! Over twenty years (two periods) From 1983 to 2003, the return was 344.9%, equal to 6.4% a year compounded. From 1984 to 2004, the return was 372.5%, equal to 6.8% a year compounded. We don't have much data here, but returns from the last twenty years have been fairly modest, thanks to the damage done between 1990 and 1995. A word about inflation In general, the price of goods and services tends rise over time, an effect known as inflation. To understand its impact, read What Inflation Means To You. Inflation erodes the value of your money over time, so £10,000 in 1983 bought far more than it does nowadays. In the period from 1984 to 2004, the Retail Price Index (RPI) grew by between 1.5% and 9.5% a year. On average, the RPI grew by over 3.8% a year over this period. As inflation has always been above zero during the above 21 years, 'real' (inflation-adjusted) returns have always been lower than the 'nominal' (unadjusted) figures quoted above. For example, when inflation peaked at 9.5% in 1990, house prices grew by a mere 0.2% that year, producing a real return of -9.3%. Ouch! If we look at one-year real returns, these vary from -12% in 1992 to 29.1% in 1988. Overall, the average real return over one year is 4.6% a year, which is pretty respectable. TOP TIP: Want to hang onto more of your hard-earned dough? Avoid these Ten Ridiculous Rip-offs! Right, that's it from me on this subject. One final warning: whatever your views on the future direction of house prices, NOW is always the best time to begin strengthening your finances, so get to it today! More: Let us help you to find better 0% credit cards, personal loans, mortgages, insurance policies and savings accounts! Cliff owns shares in HBOS.