House prices double every 7 years?

We crunch the numbers to find out how many years it takes for house prices to double.

One frequently quoted ‘rule of property investing’ is: House prices double every seven years.

How true is this claim? Let’s find out...

Double trouble?

In order for property prices to double in seven years, they need to rise by an average of 10.4% a year compounded. I know from previous research that this is well ahead of the UK’s long-run average. Nevertheless, in order to scotch this seven-year nonsense, I downloaded house-price data provided by Halifax, the UK’s largest mortgage lender.

The Halifax House Price Index (HPI) data go back to 1983 and take in the Eighties surge, the Nineties bust, the boom of 1995 to 2007 and, most recently, the 2007/09 collapse. Here is each seven-year period from 1983 to the present day:

Halifax House Price Index, 1983-2009

Source: Halifax HPI, All Houses, Seasonally Adjusted

The above data encompass 20 distinct seven-year periods. From 1983 to 2009, UK house prices doubled in six separate seven-year periods (those shown in bold). Also, house prices nearly doubled in 1984-1991 and 1995-2002.

However, five of these six ‘doubles’ occurred during the long boom of 1995 to 2007. Thus, property pundits may have been suffering from ‘recent events syndrome’ when making their seven-year claim.

What’s more, our table shows two periods when property prices fell over seven years, in 1988-1995 (down 6%) and 1989-1996 (down 4%). Again, this robustly disproves the ‘seven-year pitch’.

In short, during long, strong property booms, house prices do indeed double or better every seven years. On the other hand, from 1983 to 2009, the average value of a UK home increased by 428%, which equates to 6.6% a year. Based on this rate of growth, property prices double, on average, every 11 years and not every seven years.

Let’s do some more number-crunching, this time using house-price data produced by Nationwide BS, which goes back 57 years:

Nationwide BS House Price Index, 1952-2009

Source: Nationwide HPI, All Houses

This Nationwide BS sample extends our analysis all the way back to the Fifties and thus takes in the inflation-driven boom in house prices of the Seventies.

These data include 51 distinct seven-year periods, of which 22 saw house prices at least double. Note that house prices fell in 1988-1995 (down 11%) and 1989-1996 (down 10%), broadly in line with the Halifax HPI.

Again, Nationwide HPI data disprove the myth that house prices double every seven years. Since 1952, the average price of a home has climbed by 8,473% over 57 years. This equates to a compound growth rate of 8.1% a year, which is well below the 10.4% required for prices to double every seven years.

Based on 57 years of Nationwide HPI, house prices double, on average, every nine years.

Time for the truth

Using these data, we can make the following statement:

“On average, UK house prices double every nine to 11 years. However, this trend often fails. Also, prices can -- and do -- fall over seven years or more.”

That said, inflation -- the general trend for the price of goods and services to rise over time -- will put a big dent into these figures. After accounting for general inflation, the ‘real’ rate of increase in house prices is more like 2% a year. At this rate of growth, real (after-inflation) house prices would take almost 35 years to double.

Finally, I suspect that recent weakness in house prices may well signal the start of another downturn. In August, I listed 12 reasons why I expect house prices to go into reverse in 2010/11. What’s more, I expect the next round of house-price surveys to reinforce my view, so watch this space...

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