Busting The Great Myth of House Price Growth

by michael fickling

11:26 AM, 13th April 2017
About 2 years ago

Busting The Great Myth of House Price Growth

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Busting The Great Myth of House Price Growth

Have you ever wondered how it is that each decade or so seems to have reported house price growth exceeding all our other economic  numbers?

Doesn’t seem right somehow does it ?.

If that were really the case, then by now houses just wouldn’t be within the reach of maybe 95% of the population and despite the hype we are nowhere near that. 

So whats the explanation?

Well the most obvious concern whenever a set of claimed/reported figures look wrong is that the figures themselves are simply incorrect.

So where do so called “house price growth” figures come from?

Quite simply sales prices.

However, what those sale prices hide is the fact that any one house sold has usually been sold before and that between the two sales it’s been changed.

This is not unusual. In fact, if you think about it … its the norm. Every year we as a nation pour millions of pounds into improving/updating and enhancing our homes. I’m talking here about normal home owners… and things like new bathrooms and kitchens … new or larger garages … extra bedrooms … offices … double glazing … basement fit-outs … heating systems etc. etc. Then there are the bigger development projects of course, the house transforming stuff.

Now consider the fact this general habit of upgrade is the norm over time, and that even basic stuff like a new kitchen fit out and or a bathroom refresh add several thousand pounds to a homes value. That cost of that improvement is wrapped up in the sale price. Its not taken out.

For instance, a cheap house in the provinces, bought for say £100k (and yep they still can be in many areas ) has  fifteen thousand pounds spent on it and then the owners move on for personal reasons after two years. Hey presto,  we have apparent house price inflation or “growth”… of .. well around 15%. Now if this happens over two years the owners have unwittingly added 7.5%  per annum or thereabouts to apparent house price growth.

Now multiply that by the many millions of homes across the UK that are sold over those same two years. Very many will have been improved, likewise to our example above leverage  has effectively been applied to the overall apparent house price growth. This is because  despite the hyped up and inappropriate language often seen in the media such as “soaring house prices” ….”booming” etc. we are only talking typically about single digit gains in prices per annum, and sometimes losses. Therefore, if true, or shall we say “organic” house price growth, is maybe between two and five percent per annum typically, the simple upgrades that occur to most homes over time ( and it is MOST homes ) have to greatly distort the “growth” figure for the whole country, in fact massively so.

If true organic growth is even as high as say 5% ( and over time I actually think its a lot less ) then given the millions of improved homes resold we probably have true growth of … well … just about zero most years.

Why this has not been figured out is a little surprising, but then we are constantly fed reporting about our ascending house prices with O.T.T descriptive words repeatedly trotted out.

Its has become a little similar to the old “flat earth” scenario where for many years perceived wisdom was that the earth was flat despite glimpses of the horizon and other factors that should and eventually did raise suspicions and,  in turn, lead to rational enquiry and eventual understanding. But the belief had continued for a long time despite being completely wrong. Hopefully we can move with a little more alacrity in understanding “growth” for what it really is and isn’t in our housing prices.

Decade after decade of house prices allegedly rising beyond other stuff should have given the same sort of heads up notice to us. We should take notice. The lack of reduction in the “growth” on houses to account for improvements, additions, upgrades and development renders current “growth” figsures just about useless for most purposes, and certainly very highly and positively distorted.

Consider also that given even the official figures currently produced and in the recent past show some years as a little negative or about evens ( stagnation). Even those low years have been positively distorted upwards with current methods.  The so called “soaring” years are in fact nothing of the sort and the poor years ( check out  the major charts ) were actually much worse than the figures made them appear.

As a simple example, if most homes have had ten thousand pounds spent on them over X amount of time and that equates to say 5% of  their value, and so called “growth” based on sales also show 5% inflation ..over X .. we actually really have ZERO growth for an unimproved home over that same time.

House price growth figures just isn’t what it appears to be.

Surely we should see that there are clues here, like the horizon in the flat earth scenario?

House price growth figures just don’t stack up against other aspects of our economics.

The figures  from O.N.S  (Office for National Statistics) and the big lenders are so far distorted from true (organic) growth as to be extremely misleading.

This is all without getting into the nonsense of repeatedly using national “averages” in a country where a terrace house in the Capital is twenty times more expensive than a similar home in provincial parts. Its normal in stats work to make adjustments because such averages are not helpful to understanding. Sadly headlines saying ” house prices creep forward” just doesn’t grab the same attention as “house prices soaring”.

Returning to the compilation of the figures themselves, we have to appreciate that until improvement, upgrade and development costs are taken into account, the house price “growth”figures are extremely misleading and actually potentially capable of promoting ill-conceived actions by both governments and purchasers.

Hype and silly expressions like “soaring” help to keep this myth going and actually help to perpetuate misunderstandings. It needs sorting out. There are ways of doing so and its doing is overdue. Once done it would present an extremely different picture of true house price growth and the new and more useful figures would be a very long way down from whats touted now.



Comments

Mark Alexander

11:53 AM, 13th April 2017
About 2 years ago

Nice one Michael.

The other comparison that annoys me is the house price earning index.

We hear quotes along the lines that house prices now are at a multiple of 7.2 times earnings in comparison to 3.5% 20 years ago.

Well so what?

The Bank of England Base Rate in 2017 is 0.25% compared to 6.25% in 1997 and 14.875% on Friday 6th October 1989.

Surely the average mortgage interest payable by homeowners as a percentage of the average wage would be a far more sensible indicator?

Whilst we have Newspapers that need headlines to sell and National media overly reliant on political spin is that ever likely to happen?

One thing I very quickly learned as an ex-pat, and which all ex-pats will tell you, is how politically motivated the UK media really are. You have to be outside it to see it. Either that or compare BBC headlines to those on Al Jazeera and Russia Today.
.

michael fickling

13:24 PM, 13th April 2017
About 2 years ago

I agree Mark..Ive spent time in both Australia and New Zealand. Both countries also have a lot of small "mum and dad" property investors..especially Australia..where its somewhat of a national passion...and generally they just dont see real estate investment as a negative thing either personally or generally in the media. Also australia has had similar price rises (real) to those "alleged" here for many years and yet its not seen as some sort of big problem...oh and by the way interest rates in both those countries on mortgage products is quite a lot higher than the U.K. There does seem to be a wider appreciation that real estate and all its connected building and other trades professions and service providers.. is essential for a growth scenario in the wider economy. Both countries, I believe, also have much more generous possibilities to offset property losses against other income streams as well. Indeed id never heard of their concept of negative gearing on property prior to visiting.

Dr Rosalind Beck

18:22 PM, 13th April 2017
About 2 years ago

Excellent points Michael. There really should be national research on this - there are enough University departments dedicated to housing and observing house prices etc. I also like your point about regional variation. Patrick Collinson at the Guardian recently stated that 'some' people are paying 60 or 70% of their income on rents. In fact the EHS survey said the average was 35%. The White Paper then reported 50%... I have one tenant who takes home more than £2,000 a month, his rent including bills is £320, so the rent part isn't much more than 10% of his income and he isn't even paying the rent! So he's actually paying zero. These regional and behavioural factors are completely hidden and distorted when a journalist makes sensationalist use of anecdotal 'stats.' i.e. he probably knows one or two people in London who, stupidly, have decided to live in Chelsea even though they can't afford it.

michael fickling

12:53 PM, 14th April 2017
About 2 years ago

Reply to the comment left by "Dr Rosalind Beck" at "13/04/2017 - 18:22":

Thanks Ros.
Another problem i believe is the incorrect reading of the commonly produced house price % CHANGE charts of O.N.S and Halifax and Nationwide. All three show around about the same lines over the last ten years.Its basically just misread by a lot of people.
Unfortunately people glance at those charts..apparently even journalists..and just see a roughly ascending trend line. They fail to note that the MIDDLE of the left hand scale line is ZERO.So in fact we dont have soaring prices at all on those charts. Nothing of the sort.
Correctly interpreted they actually show as follows >>.. % price changes falling quite severely 2007 up to 2009 actually THE biggest movement in the ten years..negative or positive...( negative of course here ) then in 2009 a rise up crossing ZERO line... peaking at high single digit growth and then again falling right back down into MINUS territory again late 2010 and staying ,roughly, slightly in minus territory until 2013.Then from 2013 up to around the present it fluctuates around between plus 3 and up to plus 9 %. Soaring is for Larks. This aint no "soaring" chart! Journalists and commentators please take note!
So as ive posted before.. the currently produced figures themselves.(.which are as ive explained in the article above grossly inflated by improvements to property )...do not in any way shape or form reflect "soaring" prices..even with their in-built positive distortions by improvements to property. .And in addition London plus its commuter belts distortive effect etc... A correct interpretation of currently used/produced figures and graphs actually shows prices creeping forward at very close to their long term average ( about 3% or a little less)...over the last ten years to the present. In other words if people could be bothered to read the charts /graphs properly they would see the situation over the last ten years as just about completely normal .With London and its commuter belt out..guess what.. the market has actually generally..under performed over the last ten years! on a historical comparison. London centric MPs London centric policy makers and London centric journos..?? doesnt help either.?
Anyone who doubts my chart reading on this can easily go to the BBC news web of a couple of days back..bring the chart up there and spend five minutes correctly reading it. So... ten year term using currently positively biased counting we have around plus 3% or slightly less per annum. Put whatever factor against >>..note against <<> for improved properties<< encapsulated within this and one gets near the truth. House prices generally rise only the tiniest amount each year..maybe as little as 1 or 2% once the distortion is allowed for. Incidentally..I am based around one of the very biggest cities in the country ( not London !..)..and those are the real world figures I can actually see on unimproved homes over the last ten years or so (compounded obviously ) in my own part of the country. Hence in terms of capital growth one generally needs significant finance leverage to make houses a sensible capital growth investment...to get that 1 or 2 % up to something above a bank deposit sort of level. A factor apparently not appreciated by those who drafted Cl. 24...no doubt like most of our population they swallowed the media myths. Ignorance leads to poor policy of course. I hope to engage O.N.S on the prices and improvements issue/distortion subject shortly..apparently they "welcome feedback". I hope they do.

Luk Udav

16:10 PM, 14th April 2017
About 2 years ago

Reply to the comment left by "michael fickling" at "14/04/2017 - 12:53":

I suggest you download the data at http://www.nationwide.co.uk/about/house-price-index/download-data#xtab:regional-quarterly-series-all-properties-data-available-from-1973-onwards and plot them. If you are very careful about your starting point you can convince yourself that there has been little house price growth. It's hard to show this for any starting point other than the one you've chosen. And you have to select your region carefully.

Every single region in Nationwide's data has done better than the FTSE 100 since the Nationwide base. Yes, I know that doesn't include dividend yield but the house price data don't include rental yield.

The argument about added value by house improvement is interesting, though I suggest you overestimate it somewhat. There is indeed room for research here.

John Frith

16:10 PM, 14th April 2017
About 2 years ago

Interesting point that I hadn't considered before, but I think that for balance you should point out that housing stock deteriorates, or even just dates over time, as well. Part of the "new kitchen" will be to make it as "acceptable" as when the kitchen was previously refurbished - albeit the standard of what is considered acceptable has improved. Extensions and new swimming pools would support your argument, but what proportion of the monies spent do they make?

It's not unusual for a London property to have gone from 50k to 750k in the last 30 years. Most of them will have just had cosmetic refurbs in that time. Surely the many other economic factors would have a greater impact.

michael fickling

21:05 PM, 14th April 2017
About 2 years ago

Reply to the comment left by "John Frith" at "14/04/2017 - 16:10":

If you believe 30 year old homes have generally only had very light dressing I think you will be in a minority there. . Years back many were not even double glazed... as new...many were sold new with totally unmade gardens...many had no central heating....no shower....one loo.. extremely basic kitchens... no garage...many were just plastered and not decorated or carpeted etc etc etc.
Anyway Ok John.... lets put it this way.. shall we return to maths...if we accept true growth is a small fraction. Say 5% per annum ( very generous in my view )... and if you choose ( perhaps underestimating ) to believe only one third of resold homes have been improved by just as little as 5% added value... over say a two year period..you can easily do the maths on the distortion caused to apparent overall market prices and subsequent "growth" charts etc..by that third...of improved homes.
Two thirds at 5% per annum true organic growth times two..gives 10 % over the two years.However input the third with improvement added of just 5%..within the two years ( note within... not each )..you now have an approx. one third improved and the two thirds not improved....aggregate of the ten and fifteen %. apparent growth>>>>>>>>>>>>
something close to 12.... then to be divided by 2 (years) . So it looks like house price growth is around 6%....except it isnt its 5%...we have apparent organic growth 20% over inflated..( 6 as opposed to 5 )..Twenty percent is a huge error in statistical accuracy.....and weve worked with a relatively high annual true growth fig of 5% which i venture,,is well beyond probable long term truth....and weve worked with only one third of re sold properties only..as improved..and
also only improved by 5%. Adjust those figures to something even slightly lower than the 5% on growth ( probable ) and slightly higher on either or both % of homes improved OR or additionally in the extent of that improvement fig....or both...and the national stats are pretty much hopelessly misleading. .....Bear in mind the maths apply in good years /periods and bad ..always inflating the apparent figures to the upside.
Before anyone pipes up...... I know the maths in this simple model aint perfect..nor the terminology....the broad picture is there I think..
As time increasingly passes there is also a kind of reverse compounding.effect whereby improvements on a given home become proportionately larger and larger compared to original purchase prices.The supposed growth effect by improvement is getting larger in its effect. Its also getting getting late here tonight... ! and im not even going to go further there but many will figure it.
House price growth figures as currently touted are well exaggerated by the improvement effect ive attempted to describe... you can all make your own models..with whatever figs appeal....the effect remains to very significantly distort the figs. to the upside. The maths dictate it.

John Frith

10:24 AM, 15th April 2017
About 2 years ago

I agree that stock improvement is a factor that exaggerates house price inflation. And, to argue against myself, even cosmetic uplifts are a legitimate cost of ownership that you could argue shouldn't be ignored.

Old Mrs Landlord

11:52 AM, 15th April 2017
About 2 years ago

I agree wholeheartedly with Michael's point that like is not being compared with like and no account is taken of investment into property improvement and etension over the decades, indeed I have myself made this point on this forum in the past. The reality of these upgrades used to be acknowedged in regular rateable valuation updates but these have fallen by the wayside for so long (except in Wales) that no politician now has the courage to implement one because of the extent of council tax rises which would result.
I was amused by Michael's point that "years back some houses were not even double glazed" and houses were sold without carpets and only one loo. I live in a house which is not double glazed, has partial central heating, no gas and no mains drainage. I spent months of every childhood summer in my grandmothers' cottages, neither of which had electricity, one used well water but the other had access to a standpipe just along the road but the kitchen was a sink, a coal fire and a scrubbed table and both had bucket and chuck it toilet facilities out in the garden, so my reference points are very different from Michael's!

Nick Pope

18:58 PM, 15th April 2017
About 2 years ago

As an agent and surveyor who has been around since God was a boy (45 years in the business last week) I agree that there is no such thing as house price inflation it's simply a matter of wages and interest rates. People will pay what they can afford for the best house they can get which suits their needs or aspirations.
Improvements are not really part of the equation in my view as they are a cost of maintenance - when the kitchen is knackered you repair but nowadays that's means to replace. When I first started it was easy to spend £1000 on a new kitchen (bear with me!) in a house valued at £10,000 or so but which would be expected to last for 20 years+. Even if we spent 10% of value now there's no way that would be recouped on sale (nor would it last 20 years) so I think that linking house price inflation to improvements is a spurious argument.
All I can do is to go from personal experience. The last time I moved was in 1982 with interest rates way north of 10%. I sold at £32,000 and bought at £42,000. At the time household income was approx. £8,000.
Skip forwards 35 years and the value of the house is approx. £450,000 (1070% increase) and household income is approx. 1000% higher.
So I've made a great profit but what do I do with it? I need to live somewhere for now and I need to plan for declining years in a care home at £1000 per week (basic).
However I also have rental properties here and abroad and, on balance the investment, which has mainly come from income and re-investmemt of rents has been successful so I can go for the 5 star care home!
I guess it comes down to "Invest in what you know"

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