Nominal or real: why almost every property figure is in cash terms

Nearly every property figure published anywhere is in cash terms: the money of the day, with inflation left in. Over one year that hardly matters. Over ten it changes the conclusion, and over thirty it changes the story completely. A market that is flat in cash during a period of high inflation has fallen substantially, and almost nothing you read will say so.

What does “in real terms” actually mean?

Divide each historic figure by the price index for its own month and multiply by the index at the date you want to express it in. That restates every point in the purchasing power of one moment, so the comparison is about housing rather than about the currency.

The choice of index matters and should be stated. A general consumer price index answers “how much of a household’s spending power did this take”. An earnings index answers “how many hours of work”, which for housing is often the more interesting question and is a different correction with a different answer.

Why do so few publishers do it?

Three reasons, none of them dishonest. Cash terms are what people transacted in and so feel more concrete. The correction needs a second dataset and a stated choice of index, which is work and is arguable. And cash figures are larger, which makes for a better headline in a rising market.

The effect is that the public conversation about housing happens almost entirely in nominal terms, and the periods when housing quietly became cheaper in real terms are largely invisible in it.

When does the choice change the answer?

• Long horizons. Over thirty years the gap between the cash multiple and the real one is usually a factor of two or more. Both are true; only one is about housing.
• High-inflation periods. A market flat in cash while prices rise five per cent a year is falling five per cent a year, and every cash chart shows a horizontal line.
• Drawdowns. The clearest case. In cash terms a market can look like it drifted sideways for a decade; in real terms the same decade can be a deep fall and a slow recovery, and the recovery date is years later. One market on this network publishes both series side by side and the two tell visibly different stories about the same years.

Which index should the correction use?

Whichever index answers the question you are asking, and it should be named. Each market on this network restates against its own national consumer price index, because there is no sensible common one: an English household’s basket is not a Singaporean household’s, and averaging them would produce a deflator that describes nobody.

The England & Wales choice is the one worth arguing about. CPIH includes owner occupiers’ housing costs, which means a housing series deflated by it is being restated against a basket that already contains some housing. The alternative, CPI, excludes those costs and so avoids the circularity, at the cost of describing a basket no homeowner actually buys. Neither is wrong; what would be wrong is not saying which.

That three markets need three deflators is itself an argument against cross-country real-terms comparison, on top of the obstacles already in the way. A single figure restating Singapore and France into one currency and one basket would be defensible only if somebody bought that basket, and nobody does.

What does the correction still not tell you?

Three things, and each one has caught somebody out. A real-terms series says nothing about affordability, because affordability is a ratio to incomes and incomes do not track consumer prices. A market can be flat in real terms and steadily less affordable at the same time, and both statements are correct.

It says nothing about after-tax or after-cost returns either. Transaction costs, maintenance and the interest on a mortgage are all outside the correction, so a real-terms gain of ten per cent over a decade is not ten per cent in anybody’s pocket.

And it inherits every weakness of the price series it corrects. Deflating a mix-affected median produces a real-terms mix-affected median: the composition problem survives the correction untouched, which is why the two adjustments are usually made together and reported together.

So which figure should you ask for?

For anything over about five years, ask for the real-terms figure, and if it is not published ask what the inflation was over the same period. For anything shorter, cash terms are fine and the correction is noise. And when a source gives you only one of the two, notice which one, because the choice is doing work.

The companion question is which statistic you are reading in the first place: a median, a mean or an index answer different questions before inflation is even considered.