House price trends – a cynical English man’s view

An Englishman’s home is his castle, or so it is said. But for Brits it seems their home is their main investment.

Property has a different connotation in the British psyche than it does in most other countries. One of the most frequently uttered phrases is ‘the property ladder’. People talk about ‘getting on the property ladder’, and then once on, or so it’s assumed, they can ascend each rung, using the growth in the value of their existing home as leverage to buy a bigger and more expensive property every few years.

House prices always go up, or so they say. And the advice all would-be first-time buyers are given goes like this: “When you buy your first home, buy the most expensive property you can afford.” The advice makes sense, of course, when you consider there is this thing called a property ladder. It’s just that the Brits’ faith in their property may be misplaced.

UK house prices

It may have started at the end of the Second World War. Back in 1951, just 29 per cent of all homes in the UK were owned by their occupier. By 1981 the ratio had doubled. By 2008 the ratio stood at 70 per cent, compared with 56 per cent in France – according to data from Halifax.

And during this time, house prices shot up. And then they continued to rise. According to data from the Nationwide, the average price of a property in 1975 measured at 2008 prices was around £73,000. By 2007 it was £193,000. If you had rewound the clock further back, the rise in house prices was even more dramatic. So we saw the rise in home ownership coincide with a startling rise in house prices. No wonder the phrase ‘property ladder’ crept into common parlance.

But the period in question had another characteristic. It saw sharp inflation.In 1951 and 1952 inflation was above 7 per cent. It fell from these levels until the early 1970s, but by 1974 UK inflation stood at 24 per cent. And inflation is good news if you have debts. If you take out a 25-year mortgage equivalent to, say, three times your salary, and if over the next ten years your salary goes up with inflation, and as a result doubles in monetary terms, then all of a sudden your mortgage is the equivalent of only one-and-a-half times your salary.

Inflation, at a time when home ownership levels were rising, may have fooled the British public into believing the housing ladder was a permanent feature. This faith was sorely tested in the early 1990s when house prices fell sharply. But cheap credit, and an abundance of it, helped resuscitate the housing market later in the decade, and created the foundations for the next boom. But in the UK, house prices really do matter. Ask an economist which recession was worse: the recession of the early 1990s or the recession which we have just had, and they would say the last one. Ask a Brit who is old enough to have owned property 20 years ago, and they will probably say the recession of the early 1990s felt worse. And why is this? – because house prices fell more sharply back then. As a result, Brits felt worse off.

But this time around, and to the surprise of many, the crash in house prices didn’t materialise. Sure, prices fell, but according to recent data the average price in the UK is only a few percentage points down on the 2008 peak price. So why is this?

One school of thought says that the UK is in a unique position. It is an island. Land is limited, and the population density is high. Therefore, goes the argument, house prices will always go up. Look on the surface and you could conclude that the reason why the UK housing market got off so lightly between 2008 and 2010 was down to lack of supply, confirming the argument that the UK is naturally predisposed to high house price inflation.

But there is another explanation. Maybe the real reason why house prices have done so well this year and last is down to the faith Brits have in property as an investment. Maybe this belief created a self-fulfilling prophecy. If that is true, then the UK is vulnerable to a nasty crash in the future, as a period of low inflation exposes the myth of the ‘property ladder’.