House Prices Double Every Seven Years

...or do they? We reveal the truth behind this common property myth.

At least three times in the past month, I've heard or read the following `fact':

"House prices double every seven years."

Most recently, I came across this claim in an interview with actress-turned-property-millionaire Fiona Fullerton in last weekend's Financial Times. Alas, while Ms Fullerton may be a successful buy-to-let baroness and author of Fiona Fullerton's Guide to Buying to Let, she doesn't have her facts right.

For property prices to double every seven years, they would have to increase by an average of 10.4% a year compounded. As something of a `Statto', I know that this is well above the UK's long-run average. Hence, in order to refute this bogus claim once and for all, I grabbed the 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 boom, the Nineties bust and the return to soaring house prices under this Labour government. Let's analyse these UK-wide data, looking at each seven-year period from 1983 to the present day:

1) Halifax House Price Index, 1983-2007

As you can see, the above data encompass eighteen distinct seven-year periods. During this period, the average house price in the UK at least doubled on six occasions (the figures shown in bold). In addition, house prices came close to doubling in 1984-1991 and 1995-2002.

The important thing to note is that five of the above six `doubles' have occurred during the latest housing boom. Hence, it's absolutely clear that Ms Fullerton and her fellow property gurus are suffering from `recent events syndrome'. In other words, their statements only hold water using data taken from a decade of very strong house-price growth.

Now look at the data for 1988-1995 and 1989-1986, which take in the last property peak and the subsequent bust. House prices actually fellover seven years, by 6% and 4% respectively. That's a long way from doubling, isn't it?

So, only by conveniently forgetting the last property meltdown does the above claim hold true. In reality, these figures show that property prices grew by an average of 7.9% a year between 1983 and 2007.

Now let's check another reliable source of house-price data, from Nationwide BS, which goes back 55 years:

2) Nationwide BS House Price Index, 1952-2007

The Nationwide BS sample extends our timeframe to include modest house-price growth in the Fifties and the boom of the Seventies (a time of huge price inflation all round). During these 49 seven-year periods, house prices doubled on 22 occasions, including six recent `doubles'. Then again, house prices were fairly tame over long periods, and fell in 1988-1995 (down 11%) and 1989-1996 (-10%).

What's more, the Nationwide BS figures show the price of the average UK property has risen by a compound annual rate of 8.7% since 1952. Again, this is below the 10.4% a year required for prices to double every seven years.

In Summary

Thus, a more truthful statement would be:

"On average, UK house prices double every nine years. However, this is a trend and not a one-way bet, and prices can fall over extended periods."

Finally, I suspect that recent weakness in the housing market is set to continue, and that non-trivial house-price falls will be a feature of 2008. So, before buying a property, take a long, hard look at long-term price trends in the local area. Otherwise, if you take only the good years into account and ignore the bad years, then your retirement master-plan could come unstuck!

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