The House Price Class of ‘75.

From 1952 to 1970 (18 yrs) UK house prices approximately doubled. That’s a year on year rise of 4%, slightly below inflation. In 1975 and ’79 there were two short periods of high inflation, 27% and 22%. In the thirty odd years since then inflation has dropped back to around 5%.

%		x7	x49 yrs	x42 yrs	x18 yrs
1.03		1.23	4.26	3.46	1.70
1.04		1.32	6.83	5.19	2.03
1.05		1.41	10.92	7.76	2.41
1.06		1.50	17.38	11.56	2.85
1.07		1.61	27.53	17.14	3.38
1.08		1.71	43.43	25.34	4.00
1.09		1.83	68.22	37.32	4.72

Compound interest is a strange beast. Little apparently insignificant percentage rises can accumulate to large multiples over time. In the table above over 49 years (‘70 – 2016) a yearly interest of 5% gives a multiple of 10.92 where a yearly interest of say 8% gives a multiple of 43.43. Anyone who’s had a mortgage will know one’s sensitivity to interest rates. Now banks don’t like high inflation, it devalues what they’ve got, so the late 70’s was a scary time for them. From the 50’s and before houses were bought and sold along with inflation. Like everything else they went up year by year like the rising cost of a new vacuum cleaner but something happened around 1980, something that wasn’t in peoples consciousness before, the thought of a house being an investment. House prices rose in line with the short periods of high inflation and ‘appeared’ to appreciate in value. It’s highly likely the banks stimulated or even invented this notion of your house as an investment because they must make the bulk of their profits from domestic mortgages and ‘owning an appreciating asset’ would make a great stimulus to their business. People would be willing to pay a greater percentage of their disposable income to move up the housing ladder. And so it was house price escalation took off. From ’72 to 2006 domestic house prices increased 18 fold from £10k to £180k. It got to the point people were earning more in bed than going to work. But every householder was proud of their home’s increase in value even though it only meant they were paying more and more to the banks in interest for the exact same mound of bricks and mortar. Where inflation was 5% house prices rose by around 8% per annum.

yrs		1972-2016	1952-70
house price multiple		18	2
house rise % pa		7.50%	4.00%

If they’d maintained those pre 70’s increases that 2016 £180k house would only cost around £40k. (In 2007 US banks would lend a domestic cat $100k if they could offload the consequences in a triple A junk bond) So in a way the 2008 crisis began in the 70’s and remains today in homelessness and the affordable homes crisis. And we’ve only got our own gullibility to blame.