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A lesson in house price history

 

With opinion divided on what will happen to UK house prices in 2008, can we look to the past to predict what will happen next? Given the recent squeeze on world credit markets and fears of an economic slowdown, any glimmer of hope would be most welcome. In the table below is the House Price Index (HPI) figures provided by Halifax for the last 25 years.

 

Year

Average Price (£)

Annual Change (%)

1983
31,621
N/A
1984
34,292
8.4
1985
37,259
8.7
1986
42,262
48,825
1987
48,825
15.5
1989
68,754
5.1
1990
68,895
0.2
1991
67,250
-2.4
1992
61,643
-8.3
1993
62,867
2.0
1994
62,383
-0.8
1995
61,544
-1.3
1996
66,094
7.4
1997
69,657
5.4
1998
73,286
5.2
1999
81,595
11.3
2000
86,095
5.5
2001
96,337
11.9
2002
121,137
25.7
2003
140,687
16.1
2004
161,742
15
2005
170,043
5.1
2006
187,076
10
2007
197,039
5.3
Halifax House Price Index, 1983-2007



What can we glean from these figures? Well, according to the country's biggest mortgage lender, house prices have declined in only four years since 1983, all of which came in the infamous property crash of the early nineties. In all 83% (20 out of 24) of the years in the table above have seen an increase in house prices. So over the last quarter of a century, annual house price drops have been very rare and is something we haven't seen for the last 12 years. To get an even bigger historical picture, we can use the Nationwide BS index to go all the way back to 1952.

 

Year

Avarage Price (£)

Yearly Change (%)

Year

Avarage Price (£)

Yearly Change (%)

1952
1,891
N/A
1980
23,497
7.0
1953
1,872
-1.0
1981
23,798
1.3
1954
1,853
-1.0
1982
25,580
7.5
1955
1,937
4.5
1983
28,623
11.9
1956
2,003
3.4
1984
32,543
13.7
1957
2,030
1.3
1985
35,436
8.9
1958
2,068
1.9
1986
39,593
11.7
1959
2,170
4.9
1987
44,355
12.0
1960
2,328
7.3
1988
57,245
29.1
1961
2,543
9.2
1989
61,495
7.4
1962
2,673
5.1
1990
54,919
-10.7
1963
2,943
10.1
1991
53,635
-2.3
1964
3,185
8.2
1992
50,168
-6.5
1965
3,418
7.3
1993
51,050
1.8
1966
3,586
4.9
1994
52,114
2.1
1967
3,837
7.0
1995
50,930
-2.3
1968
4,089
6.6
1996
55,169
8.3
1969
4,312
5.5
1997
61,830
12.1
1970
4,582
6.3
1998
66,313
7.3
1971
5,533
20.8
1999
74,638
12.6
1972
7,880
42.4
2000
81,628
9.4
1973
9,767
23.9
2001
92,533
13.4
1974
10,208
4.5
2002
115,940
25.3
1975
11,288
10.6
2003
133,903
15.5
1976
12,209
8.2
2004
152,464
13.9
1977
13,150
7.7
2005
157,387
3.2
1978
16,823
27.9
2006
172,065
9.3
1979
21,966
30.6
2007
183,959
6.9

 

So what does going back to 1952 tell us about the long-term trends of the housing market? It tells us that UK house prices declined just six times in 55 years. Although Nationwide's figures are slightly different to Halifax, the overall picture is very similar. Apart from four annual declines during the nineties, the table shows only two others; both during the early fifties. Analysts may want to write something into that, but the truth of those two years is more likely to lie in the fact that Britain was still recovering from the Second World War. Rationing didn't finish until July 1954.

 

House price history may give us an insight into what to expect in 2008

This data tells us that house prices, on average, decline for one or two years in every decade. That's fine if you are able to sit tight and ride out the storm, but not so good if you're forced to sell up, or if you buy at the top of the market (just before the decline starts). As a general rule, a housing downturn is most likely to appear when prices become overstretched and move away from their long-term average. This happened quite spectacularly in the late eighties and early nineties, when property prices took until 1997 to reach their previous peak of 1989. The long run average for both data sets stands at 7.9% since 1983 for the Halifax and 8.7% since 1952 for the Nationwide. They both show that house prices have tripled in the latest property boom, over the last 12 years. That should tell us that we're heading for another decline in 2008. However, 2008 brings a number of factors into the equation that may offer house prices a parachute. These factors include:

 

• Housing supply continuing to grow far too slowly to meet demand.

• Better rates of household incomes (compared to the previous crash).

• Low interest rate (base rate currently standing at 5.5%).

• The country's economy (or Gross Domestic Product) is still growing (albeit slowly).

• House prices have been growing much slower in this boom (compared to the last boom in the eighties).

 

On a final note of reassurance, house prices would have to fall a long way for the majority of householders to suffer. According to the Halifax, UK housing is now worth an incredible £4,000 billion. Compare this to a total mortgage debt of £1,177 billion. That means that house prices would have to drop by about 70% to wipe out our net housing wealth of £2,823 billion, which really would be the crash of all crashes!