A lesson in property market history

A week, it is said, is a long time in politics, and as the campaigning begins to take off in earnest, seven days will inevitably seem an awful lot longer in the run-up to the general election.

Elections can signal a change in property markets. Agents often observe a lack of willingness on the part of buyers and sellers to commit to deals in the face of uncertainty, and so a period of low turnover precedes the new government.

Viewed in the longer term context though, a week is but a blink of an eye for the housing market. The real trend unfolds over years or even decades. So, as we enter the second decade of the third millennium, it is natural that our attention focuses on the last cycle.

According to the Nationwide Building Society, average UK house prices rose by 117% between December 1999 and December 2009. This averages 8% per annum or 6% per annum real growth (adjusted for CPI inflation). However, the true story of the housing market unfolds over the last 20 years, and now is a particularly good time to take stock of this.

Looking back to look forward

Standing today near the bottom of the market having seen, in 2008, some of the biggest and certainly the fastest price falls since the Second World War, we can look back to 1989 when similar falls were about to happen (and over a longer time period).

The housing market slump of the early 1990s resulted in overall real price falls during that decade so that average annual growth was negative in inflation adjusted terms, at -1.2% per annum.

Taken together, the decades of the 1990s and the Noughties, produced average growth per annum of 5% or 2.5%, when adjusted for inflation. This real growth broadly reflects the longer term trend for house prices to rise in line with household disposable incomes.

The growth in house prices, in excess of general inflation, is down to the inelastic supply that has dominated the UK market for at least half a century. New homes in the UK are built at a much lower rate per household than is common for other parts of the developed world – particularly where low house-price inflation is common. Soaring home-owner aspirations, fuelled in the most part by the home improvement TV shows, magazines and show homes of the Noughties, are set against this underlying shortage.

Households sought to maximise their purchasing power and were in competition for scarce stock, especially in high-demand areas. One way they did this was to increase borrowing. Mortgages outstanding in 2009 amounted to £1.226 trillion, up 375% on the £256 billion outstanding in 1989. Meanwhile, interest rates fell from 15% in 1989 to 0.5% in 2009.

This enabled asset prices, borrowing, and consequently the house price to income ratio, to increase without damaging household cashflow. Indeed, our measure of household spending power grew considerably over this period.

Rising assets

As asset prices rose, so too did the equity used in the housing market. In 1989, total private sector housing stock (owner occupied and privately tenanted) could be valued at £1.02 trillion, 0.76 trillion of which was held as equity. By 2009, the value of the housing stock was £3.4 trillion, the unmortgaged portion of which was up more than threefold – at £2.2 trillion.

The coincidence of low interest rates, poor stock market returns and opportunity for low cost gearing encouraged many equity-rich homeowners to become residential landlords over this period. This, combined with the increased inaccessibility of the housing market for those without the equity for a deposit, ensured that rental demand exceeded or matched supply.

It was the growth in the private rented sector by about 1.3 million homes, from 9% of the stock in 1989 to 13% in 2009 that was the biggest story of the last housing cycle.

Given the continued credit constraints likely to pertain in the coming decade, increased competition from the equity-rich for properties and relatively low returns on cash, it seems likely that stock shortages and the growth of the private rented sector is assured – regardless of which party is in power after the general election.