Originally published March 2022.

UK house prices have been in a bubble for almost 20 years, which makes it one of the longest-running bubbles in history.

This is very interesting, because bubbles almost never last this long. They usually only last a few years and every bubble in history has ended when the temporary factors that inflated it came to an end.

So will the UK house price bubble be the first in history to last forever or will it end just as all other bubbles have ended?

To begin to answer that, we need to step back to look at the big picture.

UK house prices have increased massively over the past 60 years

UK house prices have gone up almost every year for most of the past 60 years.

Here are some pretty impressive stats:

• In 1963, the average UK house cost less than £3,000
• By the end of the inflationary 1970s, the average house cost £23,000
• The housing boom of the late 1980s drove the average price up to £61,000
• The first leg of the current housing bubble took it to £181,000 in 2007 and…
• today the average UK home costs around £250,000

That’s an incredible 8,500% gain in house prices since 1963, which works out at about 8% per year.

No wonder so many people expect house prices to keep going up by 5% or even 10% every year.

But it takes more than rising prices to create a bubble.

Prices are only in a bubble if they’re unsustainably high and when it comes to housing, high means high relative to wages. So let’s have a look at the relationship between average house prices and average wages.

The price-earnings ratio says UK house prices are in a bubble

The obvious thing to do with house prices and wages is to look at the ratio between them, which is known as the house price-earnings ratio.

The key feature of the house price-earnings ratio is that it should be mean-reverting. In other words, when the ratio moves far above or below its long-run average (mean), we should expect it to revert back towards that average.

That’s the theory at least, and we can check that theory against reality by looking at how the UK house price-earnings ratio has varied over the past 60 years.

During the 40-year period from 1963 to 2003, the mean reversion argument seems to hold.

The average person was willing to pay somewhere between four and six times their annual earnings to buy the average home and for most of that period, the ratio was fairly close to its average of around five-times earnings.

During those 40 years, when the average house was priced at more than six times earnings, they were too expensive for most people. This reduced demand and house prices fell back towards the long-run average, as they did after the late 1980s housing bubble.

When the average house was priced at four-times earnings in the mid-1990s, houses were cheap and that increased both demand and prices.