Last updated: May 21, 2010 10:03 am

Flattened houses

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Long-term house prices offer little real appreciation

Convenient facts get attention. The first thing novice investors learn is that equities outperform bonds over the long run. Other stats receive less airplay: the fact that long-term house prices tend to track general consumer price inflation, so ultimately offer little real appreciation, is not something often heard from estate agents.

Of course, indices of house prices are much harder to track over long periods than lists of stock prices updated daily. Changes in quality and composition make comparisons difficult. Property prices are also volatile, and are capable of moving in one direction for decades at a time. Real Norwegian house prices declined for the first half of the 20th century, recovered to their 1900 level shortly before the millennium, then continued higher in the global boom.

In Amsterdam, the banks of the Herengracht canal have supported high-quality property since the 17th century. Again prices have fluctuated, but values expressed in real guilders were the same in the 1770s, 1870s and 1970s. As in New York City, and even island nations such as the UK, supply adjusts to demand through rising population densities, and improvements and expansion of transport infrastructure. From 1955 to 2000, UK annual real house price inflation was 1 per cent.

In the US, real house prices were almost flat in the 20th century, with real growth of just 0.2 per cent each year, according to an index calculated by Robert Shiller. Indeed, considering a house as an investment worth more than its structural cost is a relatively recent concept in America, limited to a few areas of perceived scarcity until the past three decades. Assuming it does not overshoot, returning to the real, pre-boom prices of 1995 suggests another 40 per cent decline, or an inconvenient 15 years of nominal stagnation ahead.

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