The myth of ever-rising house prices

Every investor in property believes that in the long run it will provide a healthy return over inflation. But that's only really happened in the last couple of decades.

Property for the long term. It's the mantra of every property investor in the UK. It doesn't matter what happens in the short term, and it doesn't matter what price you pay when you buy, over the long run property will provide a healthy return over inflation.

Is it true? Depends on your time frame.

Start in 1952 and your answer is yes. According to numbers in Safe as Houses by Neil Monnery (a must read if you are remotely interested in the history of house prices), prices rose around 2.4% a year from then to the year 2010. Start in 1995 and things are even better up 5% or so a year in real terms.

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But if you go back a bit further the story doesn't play out quite so well. The growth rate from 1900 to 1960 was around zero: "real house prices were about the same level in 1960 as they were in 1900, two generations earlier". That doesn't mean they didn't move at all. They did just not always upwards.

Prices started falling in the run up to the 'People's Budget' of 1909, when income and land taxes rose to pay for social measures pensions and later school leaving ages, for example. By 1913 they were down 20% or so, and the Economist was "gently chiding" its readers for complaining that they could not sell their houses for the prices they paid for them "without considering what they have derived from the property meantime allowing for wear and tear".

For the next few decades prices shifted all over the place until starting an almost uninterrupted, if slow, rise from the early 1950s until the mid 1990s when they went nuts for nearly 15 years.

The truth is that, while it is the last two decades that loom large, our obsession with house prices really is relatively new. Until the late 1960s very little was written on prices, says Monnery. Instead, the major themes were slum clearance, sanitation, building programmes and changes to the costs of construction. Housing was about health and wellbeing, not about money or about wealth generating assets.

And even when houses were referred to in financial terms it wasn't in a good way. Monnery quotes from Lionel Needleman's 1965 book on The Economics of Housing.

"There are considerable risks attached to investing in housing," said Needleman.

"The housing market is both unstable and unorganised. House prices can fluctuate violently and yet houses are much less negotiable than most forms of investment. It is particularly difficult to dispose of older houses as building societies are often reluctant to give mortgages on older property. For an owner-occupier buying his house with a mortgage, a slump in house prices can result in the value of his house falling below the unpaid balance of his debt. Apart from the chance of a general fall in house prices there is also the risk that the particular house might fall in value. The architectural style may become less popular or the whole district unfashionable."

That's just the introduction the gloom goes on for several more pages. It isn't the kind of thing you read much these days our property writers remain in thrall to the boom. But, if house price growth in any way reverts to its long term historical mean of something in the region of 0.7%, it might be the kind of thing we read a great deal more about in a decade.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.