How Often Do House Prices Fall?

There's a lot of talk about property prices crashing in 2008, but is it all hype? How often do house prices actually fall?

Given the worrying state of world credit markets, fears about an economic slowdown, and a relentless squeeze on household finances, it's no wonder that house prices have eased off recently. What's more, thousands of mortgage deals have been pulled since Northern Rock got itself into hot water, making life harder for mortgage borrowers.

There's no doubt in my mind: this is the worse environment facing the UK housing market since it set off on a twelve-year boom in the second half of the Nineties. Indeed, my Foolish friend Dr David Kuo predicts that property prices will dive by a fifth (20%) this year, as I warned in House Prices And The Double-Edged Sword.

In spite of this, what does history tell us about the likelihood of house-price falls across the UK? Let's find out by digging into past data provided by the Halifax House Price Index (HPI). Here's what the Halifax HPI tells us about UK-wide rises and falls going back to 1983:

Halifax House Price Index, 1983-2007

According to our biggest mortgage lender, house prices have declined nationally in only four years since 1983, and all in the early Nineties. Thus, over the past twenty-four years, house prices have risen twenty times, which is a `success' rate of five in six, or 83%. In other words, yearly declines are a relatively rare event -- and one which hasn't happened at all in the past twelve years.

On the other hand, looking back as far as 1983 only takes into account house-price changes over a quarter-century. By making use of the Nationwide BS index, we can reach back into the Fifties, as the next table shows:

Nationwide BS House Price Index, 1952-2007

Throwing our net back 55 years gives us a better picture of the long-term trend. As you can see, the average price declined slightly on two occasions in the austerity years of the early Fifties. This was a period when the UK was still recovering from the Second World War and rationing was still in force, so life was pretty tough all round.

Within this larger dataset, we find that UK house prices declined just six times in 55 years. In other words, prices rose 49 times out of 55, for a `success' rate of 89%. This is a slight improvement on the figure we obtained from the Halifax HPI.

So, on average, house prices drop at most one or two years per decade, which isn't much to worry about, right? This is a safe assumption if you can ride out the bad years without being forced to sell up. However, it can be nasty if you enter the game just before a prolonged downturn in property prices. Either you're forced to sit tight and ride out the downturn, or you take the loss on the chin.

For the record, housing (and other asset-price) downturns appear more likely to occur when prices become overstretched and move away from their long-term average. This happened in the late Eighties, when the last housing bubble burst and house prices didn't regain their 1989 peak until 1997.

The Halifax HPI puts the long-run average at 7.9% since 1983, whereas the Nationwide has it at 8.7% a year since 1952. House prices have tripled in this latest boom, having risen at 10.2% for a dozen years according to the Halifax, or 11.3% a year from the Nationwide BS HPI. Therefore, odds are, there will be a drop in the average house price in 2008.

Finally, house prices would have to fall incredibly far for the majority of homeowners to suffer. According to the Halifax, UK domestic property is now worth a record £4,000 billion, compared to total mortgage debt of £1,177 billion. Thus, house prices would have to fall by almost seven-tenths (70%) to wipe out our net housing wealth of £2,823 billion. Even mega-bears (including me) know this isn't going to happen this side of Armageddon, even if things get tough on the fringes of affordability!

More: Grab a great mortgage deal today | House Prices Double Every Seven Years | Property Prices Will Be £13,000 Lower In 2012