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Long-Term House Price Trends

April 8, 2005

Is housing a good investment? You can hardly pick up a paper these days without reading about the latest monthly house price survey from the Nationwide or the Halifax. Many column inches are devoted to whether the next movement in prices will be up, down or sideways. But let's step back and look at the long-term picture to get some perspective. This means we have to look at some numbers, so brace yourselves!

House price history

According to the Nationwide, house prices have increased by an average of 9% a year since they started monitoring them in 1973. By way of comparison, the average rate of inflation over that time period has been about 7% a year. The Halifax House Price Index starts from 1983. Since then, it shows house prices have increased by 8% a year as opposed to inflation of 4.5%. (For more on how these and various other indices work, see this article.)

It's important to take these figures with a pinch of salt. All such statistics are subject to error. In the case of house price indices for example, the numbers can only include houses that have been sold, which is only roughly 5% of the total housing stock each year. They don't include important factors like, for instance, the cost of maintaining your home or any improvements such as conservatories and extensions.

Remember too that these are just the averages. Some regions (recently the South East and in particular London) and some types of property will have increased much more. And of course, some will not have risen as much. If you managed to find a bargain, perhaps from someone who was forced to sell quickly, you may have done better than the indices have indicated.

Both the main house price indices show the same basic story, however, and that is that house prices have beaten inflation by a small amount over the long term. So it seems there is a good case to say that housing is a decent long-term investment. Other assets, such as shares, have produced a better return over long periods but have been far more volatile. However, property returns have been better than assets such as bonds and cash.

Over shorter time periods, house prices can fluctuate significantly, although falls have been rare in the last three decades. In the period from 1990 to 1995 house prices fell by around 10%. However, in the nine years since then the price of the average UK house has roughly trebled! Like any other market, housing is driven by emotion. Greed can drive prices too high at times while fear can provide some long-term bargains. Such times are easy to spot with hindsight, but unfortunately not so easy at the time they occur!

Where next for house prices?

Unfortunately it's impossible to say what will happen to house prices in the short term with any degree of accuracy. Anyone who claims they can predict what will happen with a high degree of certainty is either a liar or an idiot.

Having said that, one reasonable past indicator of whether house prices offer good or poor value is affordability. After all, most people pay their mortgages out of their monthly salaries. So comparing average annual salaries against average house prices in the past has been a fair indicator of whether housing has been cheap or expensive.

A common yardstick is that average house prices should be roughly three times average annual salaries. At the moment it is nearer six times across the UK as a whole. So, on this basis, house prices look pretty expensive. This has led many people to predict slower rises in the next few years or a period of falling prices. Of course, no one can know for sure what will happen.

Some people compare the average monthly mortgage payments against take home pay as an alternative measure of affordability. At the moment, it's around 30%, which is about the same as the historical average. Although the average mortgage is much larger today, this is offset by the fact that interest rates are low - for the time being at least. In the late 1980s however, this figure rose to 60%, explaining why house prices had such a torrid time in the early 1990s.

So what can we conclude from all this? It's best to see housing as a place to live first and foremost and secondly as a long-term investment. Prices can fall in the short term and indeed look more likely to do so than they have for several years. With this in mind, if you're looking to buy a house with a small deposit or only have a small amount of equity in your home, it's more important than ever to ensure you can continue to meet your mortgage payments for the forseeable future. The last thing you want is to fall into negative equity and also be saddled with a mortgage you can't afford.

Find out more in our Homeowning centre.