Investing in bricks and mortar? (2)

Following helpful comments on the earlier version, here's the new, improved chart showing the inflation-adjusted (in constant 2007 prices) components of house prices (i.e. land values and bricks and mortar values) from 1983 to 2007:

To sum up; your investment is not in "bricks and mortar" at all; even at the low point in the mid 1990s, at least a third (possibly half) of your investment was in the underlying land value. As the chart shows, the land value can fall by more than half in five years and take a further fourteen years to recover ...

Sources:

1. House prices are taken from the Nationwide's 'UK series', UK House Prices Adjusted for Inflation.

2. Land values are taken from the Valuation Office Agency's Residential Building Land Index, figures for 'England and Wales excluding London', adjusted for RPI inflation and assuming ten-and-a-half homes per acre (of course the average residential plot is a lot smaller than that, but you have to deduct roads, pavements, grass verges, kids' playgrounds, electricity sub-stations and so on). This is a tad less than typical new build densities of twelve per acre, but takes into account the fact that older estates had bigger gardens, wider grass verges etc.

3. The bricks and mortar value assumes that the (re)build cost/value increases one per cent faster than retail prices, because half the cost relates to labour; and wages/salaries tend to increase two per cent faster than retail prices.

4. Unfortunately, 1 does not always equal 2 plus 3; so I have also entered the residual difference (as an absolute figure). This difference was nearly £20,000 from 1995 to 2001. I can only guess that this was because new builds were more in demand than existing homes during that period, in other words, new builds sold at a £20,000 premium (?). For the remainder of the period, this residual difference was fairly negligible.