Report: What will happen to UK house prices?

Landlord Expert
By Landlord Expert February 28, 2011 14:40

 

Let's look at what's happened to house prices when interest rates moved during the past six decades:

2007 to the present

Starting with the present, during our most recent property-market crash, interest rates collapsed at the same time as property prices. This is the exact opposite to the expected correlation: it should be easier to get a bigger mortgage and pay a higher price for your property with low interest rates, which means you should expect property prices to rise.

We've now had record low mortgage rates for several years, and yet house prices have still barely moved, even when adjusted for inflation. So recent history shows that low interest rates do not always equal a swift, big increase in house prices.

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Flashback to 1952

Looking further back, the earliest data I have starts in 1952. That gives us less than 60 years of data altogether, which isn't much considering how long property-market cycles can be, but it's more than I've seen anyone else use for similar exercises.

In the period from 1952 all the way to 1989, interest rates ended the year lower 17 times and were higher 19 times, with no change in just one year. Increases or decreases in interest rates of 50% to 75% were very common so, in percentage terms, quite big moves.

However, from the end of 1954 there was an unbroken run of 35 years of rising house prices, according to Nationwide quarterly data. With no apparent sign of pausing for breath, house prices went from £1,891 to £61,495. This is despite the fact interest rates rose in 19 of those years, often rapidly and often for three years in a row.

1973 to 1989

In the final 16 years of that 35-year run of rising house prices, interest rates were extremely high. In the course of just one year, 1973, interest rates went from 6% to 13% (an increase of 117%). They stayed high for the best part of two decades, but it was not until 1989 that house prices began to fall. This is clear evidence that high interest rates alone cannot always induce a crash or, at least, not always very quickly.

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1989 to 1995

The next period is also interesting. As you know, for the following years after the long bull run, house prices fell considerably, on a quarterly basis from £62,782 down to £50,128, so around 20%. However, this was accompanied by rapidly falling interest rates. Interest rates halved in two years.

If those low interest rates did cause the following property bubble, they took their time to do their work: it took another four years of rates remaining around the same level before house prices turned upwards again from 1995.

1995 to 2007

From the mid-90s, property prices bubbled at a time when low-moderate interest rates barely moved. However, we do finally see here more correlation, because interest rates trended downwards, albeit slowly, as house prices rocketed.

Perhaps many believe prices always do the opposite of interest rates because they've been looking at that period of recent history only. However, earlier periods in history, particularly the 50s to the 70s, had similar movements in interest rates, but with no correlation to house prices.

House prices, interest rates — and inflation

It can be a good idea to adjust house prices for inflation, depending on your circumstances. Unfortunately, we just have inflation-adjusted data going back to 1975. Using this data there is somewhat more correlation between interest rates and house prices, although the picture is still quite mixed.

What this picture demonstrates is that high interest rates can reduce house-price growth, but they frequently can't reverse it.

Looking elsewhere

To get a bigger picture, I've also looked at results from similar exercises conducted in America. Again, there is some correlation, but not a particularly consistent or strong one, with house prices still managing to grow when interest rates rise high and fast, and sometimes persistently growing for years afterwards.

It can't be that simple

The evident lack of crashes when interest rates are high is likely because interest rate changes occur simultaneously with other changes in our economy. Rising interest rates may happen at times of massive job growth and therefore times of increasing disposable income and optimism.

The nub is that to say high and rapidly rising interest rates will definitely cause house prices to fall in the short term appears to be a stretch too far. It would more likely be a combination of circumstances, such as crippling personal debt and falling paypackets, in addition to high interest rates, that would kickstart a fall, but that is not a prediction.

I'm not sure which of you readers will be raving mad after reading this article, the property market bulls or the bears. Probably both. But I hope this has given you food for thought.

Having dedicated a large chunk of my research time over the years to trying to find reliable forecasters and forecasting methods (unsuccessfully) my view is not to get too bogged down in forecasting. For the same reason I have no view on the future of house prices, but I think now is the time to buy property, regardless of what you forecast (see my full article on the subject below for a more detailed explanation).

Landlord Expert
By Landlord Expert February 28, 2011 14:40

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