Since the mid 1990s, the UK has "enjoyed" substantial growth in the UK residential housing market. I say "enjoyed" because increasing house prices are a double-edged sword - they benefit those who are smart (lucky?) enough to get out at the top and hurt those who get locked in to a property worth less than the loan secured on it. I've written before on one of the factors affecting the market - the number of buyers, i.e. the demographics. Now I'm going to put my money where my mouth is and make a prediction for where prices are headed.
First, I need to point out the importance of real prices vs. nominal prices. Essentially, real prices are corrected for inflation and nominal prices are not. When discussing prices of anything over a reasonably long time period (5 years or more), it's important to use the real price because even a small amount of inflation can make large impacts to the value over time. This is due to the nature of exponential growth and I'll go into more depth on both this and inflation in a later post.
Here is a graph of real UK house prices since 1983. I've used the average of both Nationwide's figures, which go back to 1975, and Halifax's, which only go back to 1983. The correction factor is taken from Nationwide's figures, which come from the ONS's numbers for the Retail Price Index, RPI.
- The grey vertical regions are recessions.
- The grey line is the section of the population I consider most likely to be active in the housing market. People younger than this may not be able to afford to buy, people older than this are likely to be downsizing or releasing equity. In fairness, I have cherry-picked the narrow portion of the demographics that most closely matches the change in house prices, but a broader section shows the same pattern.
- The blue line is the UK as a whole.
- The red line is just for Northern Ireland, which experienced a particularly explosive boom and hence now a bust.
I've added my prediction for UK house prices with a red arrow. This is based on the demographics and also the size and duration of previous peaks and corrections.
Perhaps the most important point is that I don't think many people will "see" the continued fall in the housing market. It will be hidden by inflation. For example, the average price of a house in the UK (at the end of December) is £163,000. I think it will stay at this price for many years (i.e. the price reported by the press and the mortgage lenders), gradually falling in value when corrected for inflation.
I'll begin to be interested in purchasing a house when I see house prices in real terms stop falling. I expect this to be around 2015. Having said that, anything could happen in the future and I think we are going to see some interesting things happen in the economy over the next few years. Never before has the world been in so much debt. That's another topic I'm sure I'll delve into another day...