2.2 Changes in real house prices

You have seen that rising nominal house prices has been a phenomenon in many countries, albeit at different rates. However, the differences between countries may simply reflect differences in the changing value of money caused by price inflation. By ‘inflation’, we mean a sustained generalised increase in the price of goods and services in a country, which would result in each pound, dollar or other unit of currency buying less and less as time goes by.

In practice it would be more useful to look at the ‘real value’ of house prices: in other words, values after adjusting for changes in the general level of prices. This is useful both for a household thinking about how much more money it needs to buy a home, or how much wealth a household has really gained as its home rises in value.

Figure 3, based on the same sources as Figure 2, shows the movements in real house prices. Expressing the prices in real rather than nominal terms gives a clearer sense of how the value of property as a purchase or as an asset is changing.

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Figure 3 Real house prices, 2006–2017. Index: base year is 2010 (average of four quarters) = 100. Source: authors’ chart using data from OECD (2018).

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Figure 3 is a line chart. The horizontal axis shows years from 2006 to 2017 in intervals of quarters (in other words, three-month periods). The vertical axis is labelled ‘Index value’ and runs from a value of 60 up to 260. There are six lines on the chart, one for each of the following countries: Germany, Sweden, United Kingdom, United States, Brazil and India. The base value of the index is 100 in January 2010, so all the lines cross in 2010 at value 100.

Figure 3 Real house prices, 2006–2017. Index: base year is 2010 (average of four quarters) = 100. Source: authors’ chart using data from ...

Compared with nominal prices, with the exception of Brazil, real house prices show a similar upward trend since 2010, although the degree of change is less. In Brazil, real house prices have fallen fairly substantially in recent years – which is good news for those wanting to buy, but less good for those who already own a home (though any fall in house prices is just a loss on paper that materialises only if the home is sold). Note also that in the UK and the US, real house prices in 2017 still had not returned to their peak levels around 2007, despite rising house prices in the last few years.