All the old assumptions about housing as a one-way bet that could only go up in value were blown away. And as the housing market failed to recover year after year, some economists eventually began to question whether there would ever be a recovery. We began to hear about "structural changes" and the prospect of falling house prices for the next 20 years.
But has this painful slump really been so different? A quick look at the post-war history of the market suggests not. House prices fell through much of the Fifties and property had a reputation then as a very poor investment. A period of rising house prices in the Swinging Sixties was followed by an explosion in the early 1970s during the Barber Boom (named after a former Conservative Chancellor). This was followed by the inevitable slump in the mid-Seventies, although high inflation masked the impact. Actual house prices did not fall but, adjusted for inflation, values slumped by a third. A housing downturn in the early-Eighties recession was again masked by high inflation.
What we have experienced since the mid-Eighties is just another boom and bust cycle. Each cycle is different, played out against a different economic and political background. True, the latest boom/bust has been one of the most severe of the post-war period, but no one should doubt that what we have seen is a cycle. The housing market is like a roller- coaster and the higher it goes up, the further it has to fall.
We have come down a long way. In 1989 the average house cost pounds 69,000 against average earnings for a full-time employed male of pounds 14,000 - a ratio of five. By 1995, house prices had fallen to pounds 6l,700 while wages had risen to pounds 19,000 - a ratio of a little over three. Meanwhile, mortgage rates had fallen from 14 per cent to 7 per cent. These figures represent nothing short of a transformation in the quality of housing that the average family can afford. In southern England, where house prices have fallen by up to 30 per cent, the transformation is even more striking.
Conditions are now right for a normal cyclical upswing, as affordability is increasingly coupled with the vital ingredient of confidence. And as the wider economic recovery matures so confidence can only grow, underpinning UBS's own forecast that house prices will be rising by 7 per cent by the end of this year and 10 per cent next.
No one can predict the future with certainty, but forecasting housing swings is, in my opinion, much easier than forecasting changes in many other markets.
There are two simple rules which anyone investing in a house can usefully bear in mind. First, ignoring cyclical swings, there is a gradual upward movement in house prices in real terms (ie, after taking account of inflation) which broadly matches the growth in real incomes - around 2 per cent a year. Second, housing is a reliable cyclical barometer of the health of the wider economy. Recession is reflected in slumps in the housing market (mid-Seventies, early- Eighties, early-Nineties), and similarly, booms in the economy stoke up the housing market (early-Seventies, late- Eighties).
For anyone buying a house, these history lessons show that over the long term your house should rise in value in line with earnings and beat inflation. They also suggest that if you buy when affordability is high, typically in the later parts of recessions or in the early stages of recovery, your investment should perform even better. Affordability measures suggest that now is a good time to buy.
It is the unique nature of housing that gives rise to these results. Housing is both a necessity and a luxury good. In other words, everyone has a basic need for housing but, as incomes rise, a better home is a priority for most people. These drivers of demand are set against a largely fixed supply. As demand rises, it reaches a point where there isn't enough spare land available for the supply of houses to keep up. So buyers try to outbid each other for the limited number available.
So why are we so confident that the market's traditional pattern is set to continue in future? Because a break from the cyclical pattern of the past would require some sort of structural change, and no such change is on the horizon. The UK could be faced with a dramatic decline in living standards with a knock-on effect on the housing market, but who seriously believes this? Planning restrictions could be lifted with the consequent disappearance of what is left of rural Surrey and Berkshire. But how likely is this? A Labour government could embark on a massive council- house building programme of the sort which dampened demand for private housing in the Fifties, but who seriously believes this will happen?
No, none of the factors that could bring about a structural change are in the offing, and with an extra 4 million households projected over the next 20 years on this crowded island, who can really talk of a long-term fall in house prices from their current, historically affordable, levels?
q Rob Thomas is housing analyst at stockbroker UBS.Reuse content