Across the English speaking world – including India – a delusion that grips affluent people is that there is some sort of law in Finance which says that house prices have to rise, if not tomorrow, if not next year, then at least in the next decade. This delusion is fuelled by a belief that somehow land/housing is in limited supply and hence should go up in price.

This article busts that myth in the context of the UK. Deutsche Bank’s long term asset return study shows that UK house prices have risen by just 3% a year in inflation-adjusted terms since 1939. But before that they fell by 50% in inflation adjusted terms from 1290 to 1939!! So why have house prices shown an upward drift in the last 80 years?

The answer lies in demographics. From 1950 to 2000, the global population doubled from 2.5bn to 6.1bn. Even more specifically, as the baby boomers came into the job market from the 1970s onwards and then created their own families, they started looking for houses. As they became affluent, they started seeking bigger houses. In the Western world, this seems to have been the main driver on house prices. That impulse is now dying down as the West (with the exception of the US) ages.

It is therefore now possible that UK house prices go back to being static for a long period of time. In the East Asian context data is already emerging that family formation is beginning to decline. It is not hard to imagine the consequences this might have for house prices in a market like China.

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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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