Do house prices always go up?

UK Average House Prices

Property prices are often shown to be have historically increased upwards and so are seen as a one way bet. A chart shows that the increases are often astronomical. This chart shows the increase in property prices from 1983, with large increase occurring in the mid 1980s and another huge increase from the mid 1990s. Across the period house prices have increased by four and a half times.

Inflation

Inflation is a measure of how the price of goods and services is increasing generally in the economy. This is sometimes known as the price level. Much of the increase in house prices is related to inflation. Inflation means that the pound in your pocket can buy far less than it did in the 1980s. So whilst houses were cheaper in the 1980s so to was the price of beer, cars, food and salaries were lower.

In order to adjust for the true cost of housing we need to adjust for the increase in prices, to do this we remove inflation from the figures.There are lots of different measures of inflation, but the easiest to use is the RPI(Retail Price Index) which measures the change in price of a representative basket of goods over time.

The price level is about three times greater today than in 1983, so £1 today would buy the equivalent of 30 pence worth of stuff in 1983. We can use what is called a deflator to reduce the value of the average house to what it would have cost in 1983 pounds.

House Prices adjusted for Inflation

The revised graph adjusting for inflation shows a much steadier increase in prices, and the two falls in price now look more dramatic. 

House prices have increased since 1983, but they have less then doubled rather than increasing by more fourfold. 

It would have taken 13 years for a house bought at the 1988 peak of the market to return to its inflation adjusted pre-crash value. There was a lot of inflation in the period which disguised how sharp the drop in property price was.


The latest house price crash began in 2007. Price fell rapidly by around a little bit over 20%, in the five years since then inflation has largely remained above the 2% Bank of England target and so although the actual price of property has increased, the inflation adjusted price has fallen further as inflation has increased at a faster rate than house prices.

The media rarely reports the inflation adjusted figures as they are harder to understand, however they are more representative. Someone who bought an average house in 1983 and then sold today would have had more than four times as much money. However they would not be able to buy as much with the money as they could have done in 1983. This seems to indicate houses increases are less dramatic than appears when the increase is accompanied by inflation. The other conclusion is when property prices do fall they can stay below the peak for a long time.
By Dave C