Is housing a good investment? You can't pick up a paper these days without reading about the latest monthly house price survey from the Nationwide or the Halifax and the impressive returns that appear to be on offer. But let's step back and look at the long-term picture to get some perspective. This means we have to look at some numbers, so brace yourselves!

House Price History

According to the Nationwide, house prices have increased by an average of 9% a year since they started monitoring them in 1973. By way of comparison, the average rate of inflation over that time period has been about 7% a year (according to figures from the Office of National Statistics). The Halifax House Price Index starts from 1983. Since then it shows house prices have increased by 6.5% a year as opposed to inflation of 4.5%.

It's important to take these figures with a pinch of salt. All statistics are subject to error. In the case of House Price Indices for example, the numbers only include houses that have been sold and these tend to be those who have risen the most in value. They don't include the cost of maintaining property either.

Remember that these are just the averages. Some regions (recently the South East and in particular London) and some types of property will have increased much more. And of course some will not have risen as much. If you managed to find a bargain, perhaps from someone who was forced to sell quickly, you can make better returns. Selective improvements for a property can also boost their value.

But both the indices show the same story and that is that house prices have beaten inflation by a small amount over the long-term. So it seems there is a reasonable case to say that housing is a fair investment (because it has beaten inflation), although it is worth pointing out that the stock market has returned a lot more over the same time period.

Naturally, over shorter time periods house prices can be very volatile. In the period from 1990 to 1995 house prices actually fell by around 10%. In the next five years they rose some 40% and they have also been strong since then. Like any other market, housing is driven by emotion. Sometimes we get too greedy, seeing massive returns for years to come, and prices rise too far. Other times we are fearful and prices fall too low. Such excesses and bargains are easy to spot with hindsight but not so easy at the time.

Where Next For House Prices?

Unfortunately it's impossible to say what will happen to house prices in the future with any degree of accuracy. As we have seen in the long-term they seem to offer steady growth but in the short-term prices can move quite dramatically, in either direction.

One reasonable indicator of whether house prices offer good or poor value is affordability. After all people pay their mortgages out of their monthly salaries. Comparing average salaries against average house prices has been a fair indicator of whether housing is too cheap or too expensive.

A common yardstick is average house prices being 3 times average salaries. At the moment it is nearer 5 times across the UK as a whole but higher than that in London. So, on this basis, house prices look fairly expensive. This has led many people to predict slower rises in the next few years and even the possibility of falling prices.

However, interest rates are low at the moment. This means people can get a bigger mortgage for the same monthly payment. Some people compare the average monthly mortgage payment against take home pay as an alternative measure of affordability. We reckon it's probably a more valid measure too. At the moment it's around 30%, which is about the same as the historical average. On this basis, houses are fairly valued. In the late 1980s however, this figure rose to 60%. So you can see why house prices had such a torrid time in the early 1990s.

So what can we conclude from all this? It's best to see housing as a place to live first and foremost and secondly as a long-term investment. As prices can fall in the short-term make sure any mortgage you take on is affordable so that you don't get caught short should be unlucky enough to buy just before prices dip.

The following links provide a lot more detail on house price data. They also have some handy calculators so you can compare how your house price has changed against the regional or national average.