Trying to work out whether the economy is strong or very strong is a nice problem to have. But this episode from the 1990s highlights something else. Measuring house prices is trickier than measuring the price of shares or a basket of consumer goods. Getting a good handle on total returns is harder still. Long-run ground-level data on rental income and maintenance costs are rather scarce.
Only a small fraction of houses change hands each year. They may not be representative of the overall stock, and thus of changes in housing wealth. The average sales price might rise from one period to the next simply because more houses that are bigger, of better quality or in nicer locations are being bought and sold this year than last year.
The authors used these ingredients to derive a consistent measure of long-run returns. The results are fascinating. The net annual real return on residential property was 2.3%. That is surprisingly low. By comparison “The Rate of Return on Everything”, an oft-cited study published in thein 2019, puts the net returns on British housing at 4.7% over the same period.
Look ahead, and there are big challenges for property investors. The pandemic will change how people live and work, and thus where they live and work. Understanding the past is scarcely any easier. In the current circumstances it is not only Britons who might be wallowing in nostalgia. But it would be a mistake to exaggerate how good the past was.
Not if you consider that leveraged equity and income benefited from inflation. Despite high interest rates debt was cheap in real terms and got cheaper relative to disposable income. Real cost of debt this century is much higher. Real returns will be lower.