Worried about house prices falling? You'd think it would be a key question for buy-to-let landlords. But house prices often come far down their list of worries. Lynsey Sweales, who owns six properties in Norwich, points out that at 31, she's a good 30 years from retirement. "Property prices will have gone up by then, so I’m not really concerned."
This unshakable faith that "house prices will always go up in the long run" is a well-documented pillar of UK (and US) society. Before I took over the property beat at Investors Chronicle, I too was a believer. The number of UK households has been growing steadily for decades as a result of splintering families and immigration, and demographers expect the trend to continue. It has almost never been matched by a corresponding expansion of housing supply. Ergo, the value of housing is bound to rise.
These familiar demand-and-supply arguments are very plausible. Do the facts back them up? At first glance, yes: the cyclical, yet unmistakably upward trend of the Nationwide index goes back to 1952 and it's very convincing. It's hard to argue with 60 years of history. So I watched closely as house prices fell in 2008. As they started to stabilise the following spring, I put in a hastily-considered offer for a South London flat, using equity inherited from my recently-deceased grandmother.
For a while, I thought it was a cracking investment. Now I'm not sure. What has changed my mind is a book unoriginally entitled "Safe as Houses?", by a former management consultant called Neil Monnery. Mr Monnery is no explicit housing bear and offers no outlandishly bearish forecasts. But for those of us who find history the most powerful guide to the present, he provides a wealth of data that show, in impressive detail, how unusual the past 50 years - and particularly the past 15 - have been.
The most relevant dataset for UK home owners is Mr Monnery's reconstruction of a theoretical house price index for the first half of the 20th century, which I reproduce here.
It shows how UK house prices were essentially flat, with many ups and downs, between 1900 and 1960. Strikingly, they lost nearly half their real value in the first two decades of the century. Mr Monnery digs up a quotation from The Economist in January 1914 that gives a flavour of Downton Abbey-era dinner party chit-chat: "Owners who complain of depreciation are apt to contrast a price paid thirty years ago with what they can now obtain, without considering what they have derived form the property mean-time, or allowing for wear and tear". The contrast with today's attitudes could hardly be greater.
Mr Monnery is the first to admit that this data series, cobbled together form obscure economic surveys and specialist magazine supplements, is slippery. But it seems plausible - after all, if housing was a good investment, it would surely have been better documented by brokers. Besides, data from elsewhere paint a similar picture. In all the countries or cities for which Mr Monnery has found historical statistics - Paris, Amsterdam, Norway, the US and Australia - buying a house at the height of imperial optimism in 1900, after decades of house price inflation, would have been at best a flat and at worst a catastrophic life-long investment. In Paris, thanks to two world wars and rigid rent controls, houses had lost 90 per cent of their real value by 1950.
The lesson here is not that house prices should fall after the current 'bubble', but that the cyclical growth pattern that emerged in the 1960s is only a small part of history. In the very long run – Mr Monnery has unearthed four centuries of exquisitely detailed house-price history from Amsterdam and eight-hundred years of sketchier data from Paris – real house prices have indeed gone up, but only by around 0.5-1 per cent a year, with century-long swings in either direction.
None of which is very helpful for buy-to-let landlords like Ms Sweales, or even home-owners like me. Yet we can take comfort in a number of home truths.
First, the house we live in is a consumer good as well as an investment; it's probably more important that we are happy living in it than that it goes up in value. Second, I have focused on real house prices because inflation distorts returns, particularly over long periods. But since most investors buy property with a mortgage, and inflation eats up debts, you may well make a sizable gain even if real house prices fall.
Finally - and most importantly - lower real house prices would be good for society. High housing costs impose a tax on the economy, like high fuel prices, and inhibit labour mobility. House-price inflation is also socially divisive, rewarding the haves at the expense of the have-nots. UK house prices outside London are currently flat-lining, which erodes their real value without plunging either home-owners or banks into crisis. That's a great mercy.