Busting The Great Myth of House Price GrowthMake Text Bigger
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.
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