Here's a chart showing inflation-adjusted (in constant 2007 prices) house prices and land values (per residential plot) from 1983 to 2007:
Chart updated - see here
To sum up; your investment is not in "bricks and mortar" at all; even at the low point in the early/mid 1990s, half of your investment was in the underlying land value. And as the chart shows, the land value can fall by more than half in five years ...
Sources:
House prices are taken from the Nationwide's 'UK series', UK House Prices Adjusted for Inflation.
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 nine homes per acre (of course the average residential plot is a lot less than one-ninth of an acre, but you have to deduct roads, pavements, grass verges, kids' playgrounds, electricity sub-stations and so on).
The bricks and mortar value is simply house prices minus land values. As a balancing figure, it fluctuates about the average of £45,000; of course in real life the true 'value' would be much more stable.
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You may not be surprised to learn that we have been telling clients this since, well, forever really.
How did I know that?
Another personal factoid - my dad was a small spec housebuilder and from talking him over 37 years he showed me that his building costs stayed relatively in line with RPI so all the price increase came from the land price. He also always priced houses for sale at the prevailing land price and discounted all the land price scarcity mark up from his per home profit and pursued endless arguments with the IR as to what his profit actually was. In this way he knew whether or not he could genuinely add value with his developments. The vast majority of the 'property developers' 'making money' over the last 11 years have done nothing of the sort, they have benefited from the market uplift only, in my terms beta. They added no alpha at all.
There is a lot more to discuss about this, but it's late and I'm knackered.
Nice,clear graph,Can you post it over on HPC? Some of those nutters
are growing dangerously unhinged.(Not sure about the 45k bricks'n'mortar price price though)
I'm not sure that taking land value away from total price to get bricks and mortar price is that accurate since, as you say, bricks and mortar prices would remain stable throughout and the value for 1988 particularly is a big outlier. Your calculation for land value must therefore be a bit broken, no? (only a bit, since it seems to get it right the rest of the time!)
L, it's even crasser than that, as we have discussed before.
DBC, £45k does seem on the low side. I'll have to try again with 12 homes/acre (which seems more realistic) and smoothe the line for B&M a bit. This leaves me with yet another balancing figure, being the difference between the speculative element in house prices and the speculative element in land prices.
S, agreed, see response to DBC. The land values are based on what the VOA says, that's the best source I've got.
ML - Sorry, I forgot I had made that previous post. Old age? Senility? Booze? Ah well.
How much of the land value is caused by regulatory approval - ie the difference between plots of development land (1/6th acre?) & farmland in comparable areas? I suppose in central London that regulatory cost will not be so much since all land is for building use but in most villages it will be 95% of the land cost.
Also how has the long term trend in farmland prices compared to that of building use land?
The relatively flat cost of actual building may imply that regulations are preventing technological progress.
NC, 99% of the value of a plot relates to the planning permission, whether Inner London or Outer Hebrides. Land without planning (and that you know will never get planning) is nigh worthless.
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