Busting The Great Myth of House Price Growth

Busting The Great Myth of House Price Growth

11:26 AM, 13th April 2017, About 5 years ago 27

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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.


by Luk Udav

16:26 PM, 20th April 2017, About 5 years ago

Reply to the comment left by "Colin McNulty" at "20/04/2017 - 13:38":

This is a bit of a straw man argument. I have only seen the doubling statement put about by people running courses, and unscruplous "advisors". Any rational investor ignores such nonsense.

But take the last 4 decades. Land prices went up by 2.4% in real terms from 1971 to 2013. That's not per annum, that TOTAL. Gold - rubbish, despite what the gold bug lunatics say. 251% is about 2.25% per annum real growth. Rather better than any other asset I dare invest in.

See eureka.sbs.ox.ac.uk/5365/1/2015-8.pdf for some fascinating graphs. Indeed "it's inflation wot done it".

by Colin McNulty

8:05 AM, 21st April 2017, About 5 years ago

Nice link Luk.

0.71% real land increase over 213 years represents an increase of 4.5x (1.0071 ^ 213), so you're saying that land doubles... every hundred years! I know I'm fond of the saying: "Property is a way of getting very wealthy... very slowly" but that's a shocker, haha! 😀

Of course as property investors who have someone else paying our interest only mortgages, inflation is actually our friend, as it erodes the debt.

I saw an interview with Fergus Wilson, the 1,000 property Kentish landlord, in which he described buying 3 bed semi's in Kent for £35k* some 20+ years ago on same day (100%) interest only remortgages which were just washing their face, and he was making zero profit on them.

Now he was coming to sell them, that same property is worth £235k* but the mortgage is still £35k. Inflation (and some real growth) has eroded the debt from 100% LTV to about 15%. Which is why he was looking at about £250M to sell his whole portfolio, of which approx £200M is equity.

And of course currently they're cash flowing very nicely for him, as his rent has increased significantly (due to inflation) in the last 20 years, but the IO mortgage payments have remained static, devaluing in real terms each year, by inflation.

* My memory of his figures may be a bit off, it's the principle that's important.

To paraphrase Einstein's quote about compound interest: “Compound [inflation] is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

by Luk Udav

12:29 PM, 21st April 2017, About 5 years ago

Reply to the comment left by "Colin McNulty" at "21/04/2017 - 08:05":

I would hate to be quoted as saying land prices double every hundred years! Farmland seems to have doubled in the last decade as the city boys realised the insane farm subsidy payments guaranteed above inflationary returns.I mocked a brother in law who sold his house in Docklands to buy quite a few acres, and I've had to eat my words. I suspect the city boys are even now lobbying Andrea Leasom to get these subsidies to continue - poetic justice for the "as a mother" dimbo.

Inflation is great. I bought my first house in 1971, in Edinburgh as house prices had soared in the SE and it was clear the wave would spread northwards. With high inflation and good earning power the mortgage in 1975 was small change to my wage packet.

I've always ignored the advice of stock market gurus not to try to time the market. Some trends are obvious e.g. the move of BTL landlords out of London.

by John Frith

17:49 PM, 21st April 2017, About 5 years ago

Reply to the comment left by "Colin McNulty" at "20/04/2017 - 13:38":

I'm happy to invite sympathy for landlords in many areas of tenant law, but would avoid looking for sympathy when it comes to house prices. I suspect that many, (myself included), would have given up long ago if it wasn't for capital appreciation.

To get a realistic picture shouldn't you allow for gearing through a mortgage - a common scenario?. So the 1977 £10,000 pound house may have involved a deposit of 25% with an interest only mortgage for the other 75% (say). So your outlay of £66k ("in today’s inflation adjusted money") becomes only £16.5k. And the capital increase over 40 years is (116.5 / 16.5) x 100% = 706%. According to my rough calculations the value of the investment (after stripping out inflation) has doubled every 6.7 years. Even if you were to factor in mortgage payments, I suspect the number would still double in less than 10 years.

Lies, damned lies, and (house price) statistics eh?

by Kathy Evans

18:24 PM, 21st April 2017, About 5 years ago

Reply to the comment left by "John Frith" at "21/04/2017 - 17:49":

Hmmm. That might have once been true, but here in the NE, prices have fallen over the last 10 years and there's no guarantee that the fall (or at least stagnation) won't continue - given the political climate

by Michael Fickling

20:37 PM, 21st April 2017, About 5 years ago

Reply to the comment left by "John Frith" at "21/04/2017 - 17:49":

Your point about the achievement of CAPITAL appreciation by leverage is well made. ie organic growth on domestic dwellings is actually tiny..and it is generally only via leverage by finance that, for most of the country and most periods.., it becomes a sensible aim to make appreciable gains on house price inflation.( please>>> no diatribes about London or rental income.... ). And despite the silly headlines and rhetoric... there are huge areas of the uk which have still only just about got back to pre G>F>C price levels. including some cities.
Hence why Clause 24 is so destructive and ill conceived. Finance leverage is generally key to capital growth investment on houses and it being a reasonable investment aim..
For the country as a whole.. and long term.... true growth...without leverage... is very low single digit stuff....hardly different to bank deposits...and much more troublesome to manage and difficult to exit/realise gains.

Moving to rents... few normal and sensible small business persons would be remotely interested..generally... in a business generating income at around 4 or 5% .GROSS..on cost of same business. Those figs would be pretty typical. with a rental of a house at present...maybe even generous at current entry..

So..if one wants serious rental income its HMOs etc with all the aggro accompanying same to get that % up......or ordinary house and single family/or whatever.... leveraged by at least 50% finance...... or some sort of combination of the two..The myth that houses are a money fountain is just that. Their attraction is the long term, almost, certainty of growth..coupled with the potential of leverage via finance. Unless you are prepared for the frequent aggro of multi occupancy...houses.......then houses without leverage by finance do not stack well compared to % returns on other small businesses.
The geography student who drafted C 24 was probably ignorant of these facts....and the problems which will now follow..

by Michael Fickling

8:34 AM, 26th April 2017, About 5 years ago

The office of National Stats. have replied to my comments as outlined in the lead article i put together above.
Not the easiest reply to understand or summarise I have to say...bottom line..I dont think from their reply... that their data truly reflects the "over time" effect of significant and typical improvement to properties as they are re sold over the years. There is certainly nothing in it that would appear to capture internal improvements and additions.
They do make a comment that "houses are not traded" often?? which basically misses the point completely that a house re sold some years down the track is very likely to have been improved... a markedly more likely scenario than denuded value. Eg ( note only by illustration) the average 1940s terrace home will be hugely improved in many ways from its original features. Indeed a simple upgrade such as double glazing would ..twenty years after first sold probably exceed the original purchase price. OR.. If you prefer something over a shorter period>> a 10k kitchen on a cheap four year old house ..will also maybe effectively double its apparent "growth" price if then re sold.
I remain convinced that house prices achieved are very significantly affected in terms of GROWTH calculations ..over time ..by improvements to properties..which are constantly being fed into the figures on hundreds of thousands of sales each year. ...and given the small fractions involved in true growth and the significant value added by improvements and upgrades the figures are not showing true organic growth.They significantly over exaggerate the apparent growth to the upside.They will continue to do so until a better method is used ( incorporating full allowance for improvements..by some sort of typical formula figure )...and this goes along way to explain how each subsequent generation seems to have house price growth significantly in front of other economic indicators. That cant be both real and sustained in the way it broadly appears to have been.

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