Why our parents' homes were so much cheaper

When my great-great-grandfather died, around the end of the First World War, he left 67 houses. He was a farmer in Cardiff, and not particularly wealthy - it was just that when he had a few bob spare, he built or bought another little house.

It is difficult to avoid the impression that few things have changed more than attitudes to property. "I never once considered taking out a mortgage," says one man in his seventies. "If I needed to borrow money, I borrowed it from relatives." They did not need to be rich relatives, it seems: it was just that houses did not cost much. One house I know of that was bought in 1938 for pounds 1,000 is now, admittedly improved, worth pounds 150,000: housing, it seems, has switched from being "cheap" to being "expensive".

But the impression is misleading. In fact, the average Briton had to work about as long to buy a house in 1900 as he would today. Here are some questions and answers to explain why what we think is obvious may not be precisely so in the complex world of property.

Why do house prices rise and fall?

In the long run prices have risen in line not with inflation, but with average wages. As Britain has become much wealthier in real terms, so house prices have outstripped other prices by about 2 per cent.

So it is true that a house bought for a couple of thousand in the Fifties is now worth well over pounds 100,000. It is also true that this is well ahead of inflation. It is not, however, ahead of wage inflation: the house price to average income ratio now is lower than it was in 1955.

How can this be? My house is worth 50 per cent less than it was in 1988; my salary hasn't fallen.

The steadiness is very long term, as the graph above shows. There have been huge fluctuations around the "trend line" - in 1988 it was as far above trend as it has ever been. Now it is 22 per cent below it.

What drives these fluctuations?

Different factors triggered each cycle. But once a sharp movement has started, it gains its own momentum because people will follow to avoid being caught out. The cycle only peaks (or bottoms out) when some decide the movement has gone too far and start a reverse trend.

This is the way every economic cycle works: the difference with housing is that a lemming effect can easily take over. In the summer of 1988, for example, rational analysis would have shown that prices were too high because first-time buyers could no longer afford to buy. Yet people clubbed together to raise a mortgage, and prices rose at an annualised rate of 65 per cent.

The two great cycles since the war were in the early Seventies and over the last decade. The Seventies boom was fuelled by a perfectly rational attempt to beat inflation in the face of government inability to do so. Because real interest rates (inter-est rates minus inflation) were negative, it made sense to borrow as much as you could and buy a solid asset - and there was nothing more solid than a house. The government did its bit by introducing mortgage tax relief in 1974 - the pounds 30,000 limit was plenty to cover all but the most extravagant loans.

In 1971 a 27-year-old man bought a cottage in Gloucestershire for pounds 3,500. Two years later he had paid off the mortgage, and two years after that he sold the house for pounds 9,000. "Inflation did us a lot of good," he says. "But we felt we were riding a rollercoaster, not an escalator. When inflation took off, you never knew whether your salary would keep up."

The causes of the Eighties boom are still debated. Financial deregulation was crucial because it meant banks competed hard with building societies to offer mortgages. By 1988 this included offering mortgages worth five times income - barmy, but lenders were lemmings too. Government encouragement played its part - it made it clear it would do nothing to discourage growth. Less provable explanations include that baby-boom children had reached house-buying age, and planning regulations. In the South-east especially, green belts meant that not enough new houses could be built to satisfy demand.

Why is house price inflation a Good Thing, where other types of inflation are not?

The government likes house prices to rise because it likes the "feel good" factor this generates. But there are good reasons for seeing house price rises above inflation as normal, too. If you think of a house as an investment - the equivalent of stocks and shares - a rise seems healthy enough. More practically, 7-8 per cent house price inflation now will lift many people out of negative equity - good for them and the market.

Have we always been a nation of property owners?

Not at all. In 1910, only 10 per cent of Britain's houses were owner- occupied. On the other hand people who did own houses often owned several - the middle classes would use rent as income.

When did we start buying en masse?

Not until the Seventies. Private rented housing declined sharply after the Second World War, when the government introduced rent controls. But the slack was taken up by "social" (mainly council) housing, which in the Fifties accounted for 50 per cent of all houses.

In the Sixties building societies started to develop more sophisticated mortgages. Perhaps most important, the stigma of borrowing disappeared with the arrival of the consumer society. Away from the South-east at least, the "rich relative" remained the normal source of funds until quite recently.

The final spurt came in the Eighties when the government insisted councils sell their houses. But social ownership is still high: 67 per cent of houses are owner occupied, 10 per cent privately rented, and 23 per cent is social housing.

Is it true that we are greater home-owners than other Europeans?

No, we are about half-way down the table: Ireland is highest, with Spain and Italy also ahead. Germany has a very low level of ownership, but this is because of laws that stop a rented house becoming owner-occupied. Some Germans buy each others' houses and have a mutual renting arrangement.

What about the future?

Apart from a probable recovery in house prices (see table above), there is likely to be a shift back towards private renting. The rationale for putting spare money into property is stronger than it has been for many years. There are no rent controls, and values seem likely to rise comfortably ahead of inflation. At the same time many people have had to rent in the last few years and some will decide it suits them.

The trouble is that houses can be expensive and bothersome. In the old days labour was cheap so it was no big deal for my great-great-grandfather to put a new roof on one of his houses. Now it could be crippling.