Book review: Safe as houses?


Book review: Safe as Houses: A Historical Analysis of Property Prices Are House Prices as Safe as Houses? Our beliefs about how house prices behave are very much driven by our own experience of them.

Added on 26 June 2012 by Jo Whitehead

Book review: Safe as houses?

Book review: Safe as Houses: A Historical Analysis of Property Prices

Are House Prices as Safe as Houses?

Our beliefs about how house prices behave are very much driven by our own experience of them. Over our lifetimes house prices have boomed in the UK particularly after 1995 – since then prices have tripled in nominal terms and doubled in real terms (a rate of growth greater than 5% per year).

There are few everyday financial issues more important than house prices. Whether we own one and worry about its value or aspire to own one and are frustrated by high prices nobody can avoid the issue.

Many people think that owning a house is a certain money spinner but this is not the historical experience. Data from a range of countries going back in some cases several centuries reveals that real house prices have generally been flat over time or have increased by at most 1% a year.

Safe as Houses? by Neil Monnery Director Ashridge Strategic Management Centre looks at house prices over the long term around the world – including the UK the US France Holland Norway Germany and Australia – to find out what has happened to house prices and why. Our experience in the UK encourages a view that dips in house prices are relatively short. But this research reveals (looking at the US Ireland Japan and the Netherlands) that house prices can be very volatile over long periods.

In the long run house price indices grow just slightly faster than consumer prices. The high house price growth rates many countries have been experiencing for the last decade or so are not at all representative of longer trends.

To what extent are we right to view our houses as an investment as well as a home? If prices can rise for decades and then fall for more than a whole generation then what does the future hold? If prices rise further will houses become unaffordable for many young people? How will that affect our society? Are politicians policymakers and regulators prepared for the true range of possibilities?

  • With the perspective of decades and sometimes centuries the current boom in UK house prices is quite unusual. Over the long term it is much more normal for house prices to grow at around 1% above inflation not 5%. In some countries they have not increased much at all.
  • In the US real house prices increased at 0.2% per year between 1900 and 2010; in Norway 0.9% per year over the same period; in Australia 1.4%.
  • In Amsterdam they grew at 0.6% per year between 1900 and 2010 and data back to 1628 suggests that house prices only rose by 0.4% per year over the nearly four centuries since then.
  • Data for Paris going as far back as 1200 supports the view that real house prices grow at less than 1% above inflation over the long term.

Safe as Houses? constructs a house price index for the UK that for the first time stretches back to 1900. This shows that the recent boom is also unusual as house prices grew by less than 1% per year 1900-1995. Also there were periods where house prices fell substantially: pre World War I in the 50s the early 70s the early 80s and 1990–95.

But for now those who have been fortunate to own homes over the last few decades have seen their value surge creating huge latent wealth. In fact an average home owner has gained over £80000 in real terms in 15 years.

Houses in the UK are now worth around £4 trillion – over half of the £7 trillion total of net wealth held by the household sector. Yet in 1995 houses were worth less than half this amount (in today’s money). This £2 trillion increase is equivalent to all our pension and life assurance wealth put together.

But is it likely that these big increases will continue? Would we want that to happen anyway?

  • Increased debt (and risk). For decades mortgage debt was a fraction of its current size. But the last fifteen years have seen a dramatic rise in mortgage debt to around £1.3 trillion or about 100% of GDP.
  • Requiring younger generations to pay more for their houses than today’s homeowners had to. If real house prices in the UK had risen at 1% each year since 1995 instead of over 5% the average house would be worth about half of its current level. New buyers have to find an extra four years’ worth of post-tax earnings just to pay this capital sum.
  • Many are just priced out of the market. In 1977 the average age of a first time buyer was 27. By 2007 this had risen to 34 and it now stands at 37. If house prices resume their real growth of 5% per year then by 2025 the average first time buyer will be in their early 50s.
  • Politics. The politics of allowing this transfer to happen have been attractive so far as the winners have rewarded governments for their prosperity and as the losers have not held governments responsible for their need to reduce their living standards in order to buy a home. The ready availability of debt and low interest rates have helped to further disguise this transfer of wealth as buyers effectively defer paying for these higher prices into the future.

A number of issues including those below emerge from the analysis:

  • There is a real possibility that UK house prices are significantly overvalued and that the UK market has further to fall.
  • We would be better served by a less volatile market with less tendency to have booms and busts.
  • This longer history of house prices raises some uncomfortable questions about how much risk banks are taking in their huge mortgage portfolios.
  • How to balance the interests of housing the younger generation against the interests of existing homeowners.

For individuals for the economy and for society house prices do matter. House prices impact on all of us on a personal level as most of us want to own our own homes and also on a wider level given the way that house prices can affect the economy and the society in which we live. But as current buyers in the UK may be purchasing in a market where prices may fall further Monnery suggests that people should not take on too much debt and suggests that buyers “make sure that they are buying for the long term”.

Safe as Houses? written by Neil Monnery Director Ashridge Strategic Management Centre is published by London Publishing Partnership (LPP).