Busting The Great Myth of House Price Growth

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

I looked at the Nationwide figures and did some calculations, looking at house prices adjusted for inflation (a proxy for wages, as I could not find those data) between Q4 1974 and Q4 2016 (42 years).

London: 2016 price is 3.28 times 1974 price.
South West (my area): 2016 price is 1.99 times 1974 price.
Scotland, Northern Ireland, Wales, and Yorks & Humberside are in the region of 1.35 times.

This shows that house price inflation is real and is based on demand (if it was just down to home improvements, then it would be similar across the country).

If we look at the average annual increase above general inflation we get (approximately):
London: 2.9%.
South West: 1.65%
Scotland, etc: 0.71%

I find it hard to believe that this much value is added every year to the average home by "home improvements". And, as has been pointed out above, 'improvements' such as kitchens deteriorate over time so any increase in value they cause will not be permanent.

Reply to the comment left by "Nick Pope" at "15/04/2017 - 18:58":

Hi Nick

Excellent post which was both entertaining and thought provoking.

My wife and I also own a home in Russia, no mortgage.

In the UK the same property would cost between double to 30 times the price, but why?

The reason, as you say, is affordability and demand, but it's also due to location.

The property is about 400 km South of Moscow in a rural area of Russia so wages are very low. Mortgage rates are circa 18% so borrowing is out of the question.

High earners in Moscow can afford to pay significantly more for the same property in that area, so guess what, they do! Their earnings also qualify them to be able to borrow in foreign currencies at much lower rates, so they do. And that's why the same property in Moscow is worth 10 times as much.

As you say, people pay what they can afford to get the most suitable property for their budget.

And that brings me back to my point about UK interest rates now vs 20 to 25 years ago.

By the way, we spent as much on refurbishing the property as we paid for it but that didn't double its value. The affordability ceiling kicks in. Therefore, we had to accept that the money we spent on the property was a luxury expense and not an investment.

Some would argue that is how it should be.

The thing is that Russia could grow its population 10 fold and easily be able to build enough housing to accommodate everybody. The UK couldn't.

The polar opposite of Russia isn't the UK though. As you know, I live in a flat in Malta which is the most densely populated Country in the world per square mile. I live in the best location and that is why modern flats in my location, front line of the Harbour overlooking Valetta, start at around €700,000. That's all about demand and the desire to live in one of the prettiest tax havens in Europe.

Now don't get me started on the multi million pound yachts I'm looking at!
.

Ref Mike Barnes calculations....the figs youve actually come up with mike..very low single digit %s...per anum actually endorse my point that true house price growth is very low typically per anum.. I think you are right....it is a tiny amount in percentage terms.
I didnt say ALL the growth was by improvements to properties.....I said its has to distort the figures upwards and does so every year whether overall prices paid move positively or negatively...and that will continue and the hype and nonsense will continue as long as "improvements" to homes are not taken out when calculating price growth. Thats not the only probable distortion by the way. The key fact is that the leverage on organic growth by the millions of improved homes resold has to be mathematically significant when we are talking about tiny overall upward inflation across the country (as you yourself have identified in your own calculation.. it is tiny).This is important because it is largely that hype around property inflation that has led to silly government actions and the vilification of us as "greedy speculators" making fortunes from "soaring" house prices and to the detriment of others..Which is actually a myth...and for prices...."creeping on"...would be a more accurate. description.
Hence also it is necessary to have leverage by borrowing to make capital growth more significant ( if thats what one seeks )...and raise it into higher single digits....for most areas in most years.Hence also the foolishness of legislation tending to stop such investment...Clause 24 et al.
Thing is as long as the myth of ":soaring" house prices is continued we landlords are likely to suffer the consequences of this nonsense in terms of tax and other government interference and also in terms of public perception.
As far as I am aware no reduction formula around improved homes resold...has been applied by ONS or the big lenders...the sooner such a thing is done to correct the figures to something more useful and representing true growth the better. I have forwarded the apparent issue ive raised around improvements distorting the Figs. to the National Stats Office. Its not that hard to do IF there is an acceptance of the point and a willingness to factor this in and reduce the figs accordingly.. We do see an increasing realisation that the "national average" stuff is becoming increasingly irrelevant and some more sophisticated regionalisation of figs. Unfortunately the figs themselves seem to be still treated as "gospel" stuff...and go unquestioned by the media...and the population as a whole.
IF the O.N.S or the two notable building societies that do the charts and figs so often touted .. already somehow do make a reduction for improved homes... well it will be the first ive heard of it..and I will be interested to know to what extent and how its done . I will post here if and when they get back to me... and I guess until they do....and without anything too obvious on the ONS site. I tend to believe...they probably dont....we can only view the current growth figures with very considerable suspicion. Once an answer is achieved..I will post it....and if it is as expected we might want to canvas government on the issue. I doubt the former geography students working there ever considered such a notion .

Reply to the comment left by "Mark Alexander" at "16/04/2017 - 08:21":

Don't let Malta's president hear you call Malta a tax heaven. 🙂 . Especially as it currently heads up the EU presidency.

https://www.theguardian.com/business/2017/jan/11/malta-tax-eu-presidency-green-meps

Interestingly enough....its top rate of tax is 35%, but once refunds and reimbursements are taken into account this comes out at 5%.

Interesting article. I agree and disagree !
To those of us who have had the benefit of having lived longer then we can look back at the amounts we paid for our first property. I have no
doubt that many of us will probably be keeping a watchful eye on our first property (if it still exists) and seeing what it would fetch on the open market today, even if we still own it or not. I can do this with some degree of accuracy as the first property I bought some 35 years ago recently came up for sale again.
It still looks pretty much the same as it did when I lived in it - no extensions or anything major. So it has been maintained and one can assume its not had any other 'added value' put on it.
I bought it for £16,000 back in 1981. I had saved up the deposit and I had a sales job giving me a basic income of £5000 per annum and some commission. I saved with the Halifax and when the house came up for sale I trotted off to ask for a mortgage, I think I had £1000 for the deposit. Could not get a mortgage as the maximum they would lend at that time was 2.5 times income. That would be on my basic salary and they would not make any allowance for commission as it was not 'guaranteed'. So on that basis they would only give me a mortgage of £12.500. A shortfall on the £15 000 I needed. The Halifax manager could see I was bitterly disappointed and quietly slipped me a business card of a private financial advisor. Subsequently I was able to get the mortgage I needed and buy the house.
Fast track to the present : The house was on the market last year for £140,000. So if I wanted to buy it today , I would need to have a bigger deposit in the region of £7000 (5%) and income sufficient to support a mortgage of £133 000. If the multiplier was still maxed at what it was in those past times ie 2.5 times earnings (for a single person as I was) , then I would have to be earning £53 000 basic.
I think a sales man in the same industry as I was back then might get a basic in the region of £25 k these days. So there is no way that I would be able to buy that house in the old regime. I would need to borrow over 5 times my income. So I think houses have gone up quite drastically and I think that this is mainly due to the income multipliers being much greater now.
I stretched myself to the limit financially in order to get my first house. I had to have lodgers in to help me meet the monthly outgoings. I was happy to do this as I was single and enjoying life with few other commitments. There is no way I would be able to do the same thing again with prices as they are now.

Reply to the comment left by "Jim Taliadoros" at "16/04/2017 - 12:32":

LOL, she already knows. We've met a few times.

And if you are Malta resident and your UK shares are owned by a Maltese holding company the tax on distributions (dividends) is zero!
.

Reply to the comment left by "Mark Alexander" at "16/04/2017 - 13:08":

A business friendly government.

The Tories could learn a thing or to. Th recent changes to dividend tax in the UK, is a real pain to small business owners such as myself.

Reply to the comment left by "michael fickling" at "16/04/2017 - 11:51":

If you look at the Nationwide data for London, you will see that the headline writers have a point.

Over the 4 years from December 2012 to December 2016, London property values increased by 50% above inflation; that is worthy of a description of "soaring" in my book.
That means an average annual increase after inflation over the 4 years of 10.67%.

However, the press are behind the curve, as for the year December 2015 to December 2016 the increase excluding inflation was only about 1% (3.69% including inflation).

REPLY to Mike Barnes....Mike in just about all my posts I have taken care regarding London...and described London as an exception . In fact i have several times highlighted it as distorting the national figures.... all my references to house prices and their reporting where "biggest picture"...not London...or any other "hotspot"...large or small.
I believe the greater London population is about 10.5 Millions of people and we have fifty million elsewhere. My references to "soaring" and its absurdity as a descriptive were regarding the national picture. I stand on...the U.K overall.. does not have anything remotely approaching soaring house prices.We need to squash that myth.
It does us great harm because it has such a bearing on bad attitudes and beliefs towards us landlords as a group.
Going back to your own analysis of London if you think your 10% figure for that great city equates to "soaring"...fine..thats perhaps a little stretch of the word even there maybe..but then we do live in a world of rather inflated terminology...as I say my comments were as to the overall big picture where it really is completely O>T>T and i did specifically indicate London as different ..eg.see para third from bottom in my article above.... which initiated these threads. London may also possibly have some sharp falls..maybe also to the larger side?...so over time whilst showing some strong gains..and often THE strongest... it might also have ,perhaps, quite a bit of volatility. I would certainly see it as a somewhat different market to the great majority of the rest of the U.K. and I dont suppose many would argue with that. Its so different in fact that given factors around investment there and existing price levels there it should always be taken aside and presented on its own... alongside but not in national figures. That would help understandings all around and maybe lead to less likelihood of inappropriate policy..such as Clause 24... and inflated terminology in comment and responses from London centric MPs..London centric policy drafters and London centric media.
Actually I really like London and Londoners...just think there is really an effect on these three groups of being located in, and constantly experiencing, a property situation there which is so often so different from so much of the rest of the UK.

I looked at the myth that "house prices double every 10 years" a couple of years ago, they do, but only if you don't take into account *inflation*.

Taking a £10k property, if house prices double every decade, after 40 years it should have doubled 4 times so 2, 4, 8, 16x the original price and so would be worth £160k.

Check the Nationwide house price index and put in £10,000 house in Q1 1977 (40 years ago) and that house should now be worth £166k. Perfect, that seems to fit.

http://www.nationwide.co.uk/about/house-price-index/house-price-calculator

BUT if you then check what £10,000 in 1977 would be worth in today's inflation adjusted money, it would be worth £66k just through inflation.

The real calculation as to how much property has rise in 40 years then is £166k / £66k x 100% = 251%.

So if 40 years, house prices have only doubled once, and a half.

If you play with the dates, you find it took approx 30 years for the house prices to double, once.

There you have it, the myth of house prices doubling every 10 years is more a story of inflation than anything else.