Vague ramblings

Stagflation: bet your house on it?

Posted in Business, Musing by Ian Cundell on 25 September, 2013

My chum Mark Clementson’s question was simple enough: what would happen to £10,000 left in a bank account in 1966, the short answer being that the paperwork to access it would probably be quite tiresome.

But that’s not the interesting bit.

I, being me, couldn’t let it lie. What, I wondered, would ten grand left on deposit be worth today? Give or take a few quid, the answer is about £170,000. Of course, in isolation, that number doesn’t mean much so here it is again with a couple of others:

The 2013 value of £10,000 invested in 1966:

  • Deposit account £167,000
  • Stocks and shares: £367,000
  • Housing: £471,000

But that’s not the interesting bit, either.

Take inflation into account, say. What would that money be worth in real terms?

  • Deposit account £10,070
  • Stocks and shares: £17,500
  • Housing: £31,500


But we still haven’t got to the interesting bit. Time for a nice graph.

Investment performance since 1966

Investment performance since 1966

You can see the strong performance of housing, despite the impact of a catastrophic housing market collapse in the early 1990s and, again in 2008. Similarly you can see the truly abysmal performance of savings and that the critical damage was done in the 1970s. Think about that: savings have not really recovered from the 1970s. If you wanted to make money, a bank was not the place to do it.

Stocks and shares are somewhere in between but you can see the utter devastation wrought on the economy when the Barber Boom came crashing down. There are a couple of other spectacular wipeouts, but as with savings, it was the 1970s that did the damage. Conservative Barber’s money-printing and Labour’s inability to get the (inevitably) consequent inflation under control crippled the UK economy. It was left under-invested, under-capitalised and for sale to the highest bidder.

Of course, 1966 is an entirely arbitrary starting point (remember Mark’s question). Different starting points would generate different real terms graphs. I’ll return to that another time, but that’s not the issue here.

And this is where it gets interesting.

Two entire generations – in broad brush terms, those who became self-aware between roughly the mid-60s and roughly the mid-80s – know a few truths, shown in this graph:

  • Savings are useless
  • Shares are risky
  • Housing is safe

The generations since might have seen things differently, thanks to a huge housing crashing in the early 1990s, but equally bad share collapses create only a slight modification of view.

  • Savings are useless
  • Shares are risky, unless you can exploit under-priced privatisations
  • Housing is safe, so long as you can cover the mortgage payments
Housing transactions, 2002-2011

Housing transactions, 2002-2011

The return of negative real interest for a period after the credit crunch will only have reinforced this.

The trouble is that credit is harder to come by than any time since the 1980s. The number of transactions and mortgage approvals today is not far shy of half the levels the pre-credit crunch era. Yet house prices are rising, according to Nationwide.

The trouble is, that real wages are falling. Add this to hard-to-get credit and the absolute lack of any incentive for middle-aged and up home owners to sell and we have a bind.

Indeed, it is quite possible that we are witnessing the return of a much despised old acquaintance, wearing a new suit and shoes, but still keen on wielding its pernicious influence.

Welcome back, stagflation: the housing market edition.

(The views expressed here are not in any way advice and are subject to change in the face of new evidence)


4 Responses

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  1. John Swire said, on 25 September, 2013 at 11:45 am

    I think the piece is incomplete. If you own a property for 50 years, over that time, you will have decorated it a half-dozen times, probably replaced the boiler, fitted double glazing and changed the kitchen and the bathroom. If one lives in the house (or rents it out) one does personally attain utility from that expenditure, but a house which hasn’t been modernised or maintained over the period would depreciate relative to similar houses which have been maintained. The average house in 1960 is not the same as the average one in 2013.

    Therefore to compare the appreciation in house prices with the appreciation in shares (which make no maintenance and just sit there accruing value and paying dividends) is not like-for-like.

  2. John Swire said, on 25 September, 2013 at 11:57 am

    Also I think your language is counfusing. Your charts show that investing in houses is risky (subject to rapid fluctuations in the short to medium term) and that putting your money in the bank is safe (subject to gradual depreciation in the short to medium term due to the effect of monetary inflation). Risky/safe describes the of losing all or a proportion of your capital as a result of your investment over a given period. There are many periods during the last 25 years when you could have lost 25-33% of your capital by investing in houses – usually when everybody else is doing it.

    Houses have been the best performing investment over 50 years but they haven’t been a ‘safe’ investment. Putting your money in the bank really IS safe, but there is no real gain.

    Is investing in houses right at the moment with a 25 year horizon safe? Only if you think the boom that has lifted prices can be perpetuated over that time.

  3. Ian Cundell said, on 25 September, 2013 at 1:00 pm

    I think that you may not have realised that this is a real terms graph: the pattern eliminates inflation. And in real terms, despite a couple of bumps, housing has been the outstanding performer on this timescale. It is a paradox that to understand inflationary expectations the best approach is to eliminate inflation.

    It is a simple truth that *so long as you could cover your mortgage payments* then over the past 50 years residential property would bale you out sooner or later (the same is not true of commercial property). This has shaped inflationary expectations. You are right that at various times you could have taken a bath, but that is not what was being looked at.

    Browse around, say, the last 5 years worth of commentary on the residential property market – the 1990 crash has been all but airbrushed out of history – yet everyone I know felt pain, if only through not being able to sell up (not me – I was renting). The detailed causes of this are not especially interesting (short version: absurdly easy credit bleaches minds). The consequences, however are.

    Your last sentence is the important one: I think we are about to go through a generational change in expectations. And that will be the subject of the next blog. I continued to lay with the numbers and it was more interesting than I expected. As Homer Hoyt ( put it: the property cycle repeats itself, but not the same as before.

    (BTW, maintenance costs are not a factor in this analysis: most are inevitable and those that aren’t can be assumed to be captured in the selling price)

  4. Mark Clementson said, on 26 September, 2013 at 1:22 pm

    It’s not my fault. It was a very simple question. Just saying.

Do feel free to chip in...but be courteous when doing so. Ta.

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