The House Price Hockey Stick
by Ken Gibb
A couple of housing-related things gave been going round my head in recent days and I thought it might make sense to link them, however, realistic or useful that might be.
First of all, a couple of weeks back I was at the Scottish Housing Event in Edinburgh, a government-led housing policy and practice conference about delivering the Scottish Government’s housing strategy, building out of a series of workshops and roundtables. It was all very inclusive and participative, if not, as yet decisively conclusive. However, apart from the interesting nuggets and networking that went on there was, for me, a striking contextual presentation by David Signorini from Communities Analytical Services (a written up version of the presentation is on the Government website dedicated to the conference: http://www.scotland.gov.uk/Topics/Built-Environment/Housing/reform/housing-event,) The slides covered a range of important background trends and themes but the one that struck me the most concerned house prices and affordability.
The Communities ASD diagram (based on ONS data for Scotland) shows that while real house prices have come down since 2010, the impact on the house price to earnings ratio has been moderated by first falling and then flat earnings. Moreover, the absolute level of the ratio, falling from just over 9.0 to a little less than 8.5, remains very high, historically (i.e. 2010 was I think the modern record high).
Despite the recent moderating trend, it is quite hard to overstate how bad these numbers really are but some voices will no doubt say: don’t worry; there will be a correction once interest rates rise and some process of mean reversion will kick in. I, for one, am pretty sceptical that we will get back to stable price to income ratio values of 4 or even 5 and that is where the second issue comes in.
Via a retweet at the weekend of Tim Hartford’s blog I read the excellent paper by Katharina Knoll and colleagues, summarised in the VOX CEPR portal at http://www.voxeu.org/article/homes-prices-1870.
In their paper, Knoll, Schularick and Steger present a new house price index for 14 developed economies using a consistent data series from 1870 to 2012. This provides a fascinating long term house price series. Now, I would be the first to recognise the difficulties of pooling international house price data but it is intriguing reading and raises some big questions.
First of all, they find in general what they call a hockey stick pattern – real house prices were relatively stable till the middle of the 20th century when they started an (ongoing) strong and accelerating increase in value – tripling since 1900. This is despite the relative stability of income growth – i.e. the price to income ratio especially in recent decades has been increasing sharply.
Much of this real house price growth is associated with booming land prices (some four-fifths of house price growth is explained since 1950 by rising land prices). They argue that this has become more pronounced because of the long term effects of reduced transport costs making more land economically usable (increasing supply) until the post-war period when land became more like Ricardo’s fixed factor of production. They also point to the importance of restrictions on land use at the same time that economic (income elastic) demands for housing space increased.
Second, Hartford like Knoll et al also link this to the Picketty thesis that capital has become much more important in recent decades because in part of the growing role of private housing wealth and rising real estate asset values. Rising price to income ratios stretches unaffordability and reinforce inequality by locking more and more people out of home ownership who might previously have been able to get on the ladder – but tighter lending rules and unreachable price to income ratios serve to segregate further insiders and outsiders. And as others like Beverley Searle have previously noted, this is likely to have all manner of ramifications as cohorts of people have no assets to turn to meet risks and care costs, etc. in later life – the long term neglect of house prices will end up in part increasing public spending and higher taxes or at least putting further pressure on budgets to support care and other age-related services.
The historical record suggests that rising real house prices (and relative to incomes) are a long term feature of capitalist economies – so, to the extent that the future remains similar to our recent past couple of generations, do not expect a sustained mean reversion to earlier more affordable days any time soon.