Tuesday, Mar 30, 2010
Oh Noes!
This Is Money: House prices are already back to normal
There’s plenty of talk about house prices returning to their long-term average – well this Nationwide chart says they already have. The graph shows that real house prices are already back at trend level, ie where they should be. To the house price crash gang this is extremely troubling. They were looking for that red line to just keep on heading down – not have its fall sharply arrested in mid 2009.
Posted by little professor @ 06:01 PM (3215 views) Add Comment
56 Comments
- If you do not have an admin password leave the password field blank.
- If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
- Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
- Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
- Please adhere to the Guidelines
1. Crunchy said...
LOL.
Seems reasonable to me. LOL
2. paul said...
This either shows a remarkably poor understanding of how outliers affect trend lines or a remarkably short sighted attempt to divert attention away from the fact that no-one can afford to finance housing purchases at current prices but sellers are staying put because the government is giving away money to them.
Either way it is a remarkable misinterpretation.
3. Sharpe said...
Why would an exponential trend be suitable?
4. alan_540 said...
The only way is down baby!
5. paul said...
Simon is also This is Money's specialist mortgages and property writer
Ah. That'll be it then ...
6. mrflibble said...
History doesn't always repeat itself but the current point on the graph is looking very similar to the point during 1991.
Since the average man on the street cannot afford the average house (without selling his Grandmother) then sanity would suggest it will head back down. That said, we have become a nation of people who eat their young so who knows...
7. sneaker said...
good job prices clung exactly to the long-term trend line all along, eh?
less facetiously, look closely and you'll exactly the same thing happened last time on the way down in 1990 and 1991.
Red line dropped frmo the high to touch the blue trend-line, then rose for a bit, then then next decline set in.
It's called "wave b".
The deflationary effect of massive (bigger than Thatcher) public sector cuts, a War on Bankers (far more worthwhile than the War on Terror), the EU's likely anti-City direction and a domestic 50% top-rate tax incoming provide all the rationale we need for the next leg of the decline.
The small bounce we've seen should be called the "Election Rally" as the incumbent gov't does whatever it can to window-dress the economy in their bid to stay in power.
It all makes perfect sense.
8. sneaker said...
and note how "two parliaments of pain" (8-10 years) gives a good projection of when the ultimate bottom in house-prices will be.
might be a bit earlier, depending on how good a job the next gov't does of clearing out its debts...
9. mark said...
the trend line cannot be correct, as how can the average person actually afford the average house?
10. Alfred_the_great said...
the line itself will move downwards subsequently - this is just someone applying a 'line of best fit' in excel, not the work of a statistician
11. karlos said...
Has the author not stopped to consider that.... An exponential trendline is utterly arbitrary? Why should HPI equal 2.9% above inflation year-in year-out? This means that, over 40 years, house prices will increase 214% in real terms. How about 884% in real terms over 80 years everybody?
Utter bunkum! Any fool with a spreadsheet can "Add Trendline" to the last 20 years' data and impute some sort of pattern. Can we extrapolate from it? Of course not.
12. Geneer said...
LOL. The nationwide figures have been "on trend" since they began.
What a plonker.
13. Property Babe said...
The trendline is the trendline. There are various reasons why house prices have outpaced inflation.
Would you have the author imply a flat trend on the basis that it would be fairer? Incorrect, but fairer?
Houses in the UK get more expensive every year. Fact. Get over it.
14. Thecountofnowhere said...
Didnt that line use to be way below ?
15. Zebbedee said...
The trendline displays the best fitting exponential curve to the data and is merely a convienient relection on the past data and says nothing of the future. Th author is clearly a moron of the highest order.
16. easybetman said...
Firstly, I am interested in the effect of parents withdrawing their housing equity to help their children. Once this MEW is finished (and perhaps it is nearly finish), then what would happen to house prices.
Secondly, giving the slow or negative economic growth, would Britain be facing depopulation (or depopulation of the sorts who can buy a house) ?
17. Neil B said...
If there was an active market I'd take notice of that graph, however, there is the lowest volume of sales ever. Might as well show price fluctuations in yachts or Dali paintings - only the very rich are going to be buying
18. smugdog said...
Well, we've been waiting an eternity for the ‘bubbles’ graph to start playing ball,
but it’s stubbornness has been a real bugbear to many on this site.
Now 'this' graph seems to be running on course very sweetly indeed.
Spring has definitely sprung.
"And then my heart with pleasure fills,
And dances with the daffodils".
19. alan_540 said...
@7 mark... Yes, I think that trend line is misleading as well. I'm sure it's a best fit mathematically but doesn't reflect the reality of the situation.
20. tenant super said...
@ 9 "Firstly, I am interested in the effect of parents withdrawing their housing equity to help their children."
Reminds me of a game of Jenga. Pushing the blocks out at the bottom to add to the top, making the tower more and more unstable. Assuming that players have perfectly steady hands, the game only ends when a player is forced to collapse the tower through lack of any remaining move which would leave it in a stable state.
21. Thenewdoctorwho said...
Who was it this week that said something along the lines of "one of humanity's biggest failures was not understanding the exponential function"? Poorly quoted I know but the gist is there. You can fit an Exponential trend line to the number of dots pac man eats in a year, doesn't mean anything. There is no underlying principle that says it's an exponential function. Also, where do exponential functions end up? Yes, the number 8 on it's side! Pity wages aren't going to follow. What's missing is the inflationary pressures also. Ooops, just realised that I've wasted my time typing because none of my comments ever make it on the blog. Never mind.
22. debtfree said...
I'd compare house prices with a mixture of petrol and cigarettes.
Only an idiot would pay £6 pound a pack to chuff away, but at the same time, he / she has to drive to work or visit family.
Same as houses, only a fool would pay over the odds, but at the same time, he has too.
23. mr g said...
But what about affordability?
Average price of a typical property £164,519, Nationwide House Price Index March 2010.
Median weekly pay April 2009 £489 = £25428 per annum and this is distorted by 10 per cent of full-time employees earning more than £971 per week, while 10 per cent earned less than £271.
However, let's say £25428 is correct and pay has increased by 2% since April 2009 (highly unlikely for a lot of people, I know) therefore the average would now be £25937. Let's also say that one of our would be borrowers only earns half the median salary = £12969 making their total income £38906 pa.
If mortgage lending returned to sanity, say 3 times income of both borrowers, the average mortgage would be £116718 and a 10% deposit was obligatory, I calculate that an affordable house price would be £129687.
So boll*cks to "House prices are back to normal", how many ordinary people can afford the average price?
And that's coming from a boomer by the way, we're not all the avaricious, grasping barstewards that some people imagine us to be.
24. sceneclub68 said...
@ debtfree, 9.08pm
The last time I mixed petrol and cigarettes, the resulting boom was more considerable even than the one which topped out in 2007, I can tell you!
25. Sparkzz said...
@mr g,
It's the mortgage 3x multiplier that's part of the problem. Banks are starting to get back to their old habits. My partner and I earn exactly the median salary (£38k ish). Found a broker today able to get us a mortgage for £225k (and that is without lying!). Madness!
26. debtfree said...
@ 15. sceneclub68
Ha ha, like it.
No doubt you were smoking Raffles whilst filling the Vespa.
27. hpwatcher said...
I simply don't accept that the chart shows the average high - but it does show that the Labour government will do absolutely anything to keep the bubble inflated.
28. debtfree said...
Mr G......
"So boll*cks to "House prices are back to normal", how many ordinary people can afford the average price?"
Ordinary people aren't meant to afford a house anymore, it's called a luxury. How many people can afford a car ? or a holiday ? ordinary people are no longer welcome, they have become the sort of hangers on, neither unfortunate or successful, just there.
get used too it.
29. luckyjim said...
Firstly, as we continue to be more 'productive' our incomes grow in real terms. If house prices are related to incomes, they too will rise in real terms.
Secondly, as demand has grown faster than supply, we have been forced to allocate a higher proportion of our incomes to housing. We used to spend less than 20% of our income on housing. Now it is around 30%.
It's true that neither of these trends can continue forever but it was also true 20 years ago. Every year we produce/consume more. Every year we sacrifice a little more of of income as we compete for a limited supply of housing.
It's also true that this trend creates 'haves' and 'have nots'. The haves bought early in the trend and live in houses they could not afford to buy now. There is nothing in economics that would automatically cause this to revert to a more equitable distribution. The idea that there is a cycle and that house prices will eventually be affordable again is, I'm afraid, wishful thinking. They might be affordable again one day, but there is noithing that makes it inevitable.
30. tenant super said...
LJ @ 19 "The idea that there is a cycle and that house prices will eventually be affordable again is, I'm afraid, wishful thinking."
I agree, just look at India, the thousands of people sleeping on the streets have a basic need for housing, doesn't mean they inevitably become affordable to them.
However, there are indicators such as unemployment, impending governmental spending cuts and lack of finance that indicate that they might drop. The notion they will drop to 3.5 salary is flawed. The proportions of people's salaries spent on various things has never been constant. My parents spent a much higher proportion on food than I do.
31. shipbuilder said...
I keep hearing this argument that our spending has fundamentally changed due to cheaper food, two incomes etc. Maybe in comparison to 20 years ago.
Houses were affordable about 7 or 8 years ago. I doubt any big changes have happened since then.
The only difference between then and now is cheap credit. If anyone can produce any evidence that our spending habits/income have fundamentally changed in the last 7 or 8 years to lead to permanently higher prices it would be interesting to hear.
32. devo said...
21. shipbuilder said... The only difference between then and now is cheap credit.
You fail to mention that while credit may still be relatively cheap, it is no longer easy.
This is hugely significant.
33. mdmick said...
I disagree with the writer (whose article has clearly come out a couple of days too early).
I see a slight upward curve in his graph and, if anything, houses are therefore slightly above their long term average.
Even his graph contradicts him.
34. nubbers said...
If you have a look at Case Shiller data for the US, that goes all the way back to 1890, you can see that since 1980 Nationwide and Case Shiller follow very similar patterns and both show a trend upwards.
However, with the context of more data, the recent peak looks more like an abberation, as do the lows after the Great Depression and WW2. Overall house prices really look quite flat with normal prices being about the equivalent of the mid 90s. I would like to find the equivalent UK data, as I am certain the pattern would be the same.
This is a bad case of lying with statistics. Even this site is guilty of the same thing by showing the big red trend line going upwards on the graph on the home page. No wonder almost everyone in this country is convinced that house prices only ever go up.
Really must sort out how to add links properly, but here's one url for the Case Shiller data:
http://seekingalpha.com/article/147035-updated-case-shiller-100-year-real-estate-chart
35. devo said...
house prices are about to go down and fast, unless...
* lending criteria is relaxed again
* an ever smaller sample is used to compile statistics
* there is a 'black swan' event which leads to hyperinflation
36. tenant super said...
@ Shipbuilder- Houses were affordable about 7 or 8 years ago, true, but they were at the start of a climb after a crash. Incomes and spending habits and lifestyles are different now than they were at the last nadir of prices (the trough during the 90s collapse) I still think we'll see a decline in prices, I just don't believe the nadir will be 2.5 x average salary as it was in the nineties. A collapse to 3.5 salary (on a generous measure of salary of say £30k rather than the real figure) would mean a decline to £105k which is possible but seems a little improbable.
I do hope you're right and I have just been blindsided by a decade of HPI and the spin!
37. Airmiles said...
Er, if you regularly follow that Nationwide graph, you'll know it's constructed in such a way that it ALWAYS extrapolates back from the current price!
In other words, the blue line has NO relationship to the intermediate points.
But hey, let's not let facts get in the way of assertion...
38. devo said...
@tenant super
you are a clever girl
with a narrow focus
39. gone-to-colombia said...
Prices are going up are they?
With what?
40. devo said...
shipbuilder - just read the first couple of pages of straw dogs
i sense i'm 'ahead' of gray already
i look forward to being proven wrong
41. miken said...
@14, I wonder how many people (perhaps HPC followers) who did not want to buy a house early in their career, but instead saved up a much larger deposit. The average house price might then be realistically affordable. One has to assume there are some wealthy renters out there (e.g who made their money in London) who chose to rent rather than buy whilst in an insecure (yet lucrative) job.
42. fallingbuzzard said...
@30, I think the current wealthy renters made their money in London through property and leverage, not because of renting. Over the last 20 years, I had fairly, but not very, lucrative job and a businesses, yet I made far more from the properties I lived in and subsequently rented out. I now own no property but have three times more assets than the total after tax income I ever earned from salary and selling a business. This is the lie. The lie that the whole country has been living and is so difficult for us to get out of. Most of the two thirds of my wealth that came from property is entirely false and the majority of people in the country also share in this false wealth which future generations now have to be convinced to pay for, let alone national debt etc etc. Its not plausible for this to happen so I expect a big nasty war very soon.
43. devo said...
'so I expect a big nasty war very soon'
NO!
it is time to move beyond this knee-jerk reaction, which has always (in recorded history, at least) benefitted the few at the expense of the many
44. cornishman said...
War does not determine who is right - war determines who is left
45. letthemfall said...
Interesting how quite a few hpcers are beginning to believe in endless house price rises. There are few reliable guides in economic matters, but one of them is reversion to mean. House prices have long followed a trend related to incomes. They do not fall below for the very good reason that land is an asset with a fixed supply; and they do not rise above because they become unaffordable. Since credit became more available they oscillate about the trend more severely. To believe that prices will permanently depart from incomes is to believe that things are different this time. Maybe that's a second reliable economics guide: people always believe it's different this time.
46. Simon Lambert - This Is Money said...
No offense, but did some of you actually bother to read what I've written?
I'm debunking the suggestion that this stalling and slight uptick at the trend line is 'a panic over we've returned to normal point', which seems to be the thoughts of many of those in government, financial authority and the media.
However, I'm also pointing out that this point of view carries such weight when combined with the UK's propensity for property mania, that that uptick could keep moving up before it comes down again.
Note this paragraph: 'But where next? Logic and common sense says that red line goes down soon: but the UK’s propensity for extreme property mania and the lack of a prolonged painful reminder against overextending says it will head up before it makes a substantial move down once more.'
I'm glad this provoked a reaction, but occasionally it can be an idea to read things before commenting.
Cheers
Simon
47. mark wadsworth said...
The graph is misleading as house prices are better expressed as a multiple of average earnings, which also increase nearly 2.9% faster than inflation.
That said, back in 1996, the price appears to have been 30% below the trendline, so there's still a long way to fall (bearing in mind that falling prices will flatten the trend line as well).
48. uncle tom said...
@34,
Correct. The price of homes, over an extended period, will tend to correlate with incomes, subject to the influence of social trends - and nothing else.
Anyone with half a brain would realise that these trend lines only reflect the recent past, and are no basis for predicting the future.
49. Geofk said...
go back and read the ps ....you all have not read it properly
50. Geofk said...
PS. It appears that many people who have decided to comment on this blog and on it at the always entertaining housepricecrash.co.uk seem to have not read what I have written, or missed the nuance here.
My post is debunking the suggestion that house prices have returned to normal - not saying that they have. Prices have fallen back to the trend line and then bounced back up, there seems to be a disturbing view coming from the government, financial authorities and some in the media, that things are now back to normal.
However, I'm also pointing out that this point of view carries such weight when combined with the UK's propensity for property mania, that that line could concievably keep moving up before it comes down again.
This graph has been used on many occasions before by house price bears to show why prices should fall when they have been above that trend line - I am now showing how it can be used on the other side to presume we are back to normal.
I don't know what's going to happen to house prices. As I point out, common sense and logic says down - but since when did common sense apply to the UK property market? I do think, as I also pointed out, that property is too expensive.
I know it's difficult sometimes, but it can pay off to read what someone has actually written before commenting. I've added some inverted commas in the headline to help people grasp the nuance and put a note in above the graph.
51. need-a-crash said...
Looking at the graph, during the early 80's crash, prices didn't dip much below the trend line, so is not at least possible that they won't dip much below it this time round, leaving the 90's crash as the aberration?
52. mark wadsworth said...
To be fair to GeofK, the article was fairly tongue in cheek and he did a long PS to tip off those of us who might have taken it too seriously.
53. luckyjim said...
Simon Lambert@46
People are commenting on the data, not the article. Your view is noted but carries no more weight than the thoughts of anybody else here.
54. Simon Lambert - This Is Money said...
Luckyjim, some may be commenting on the graph not my blog (including yourself), but others weren't,
My riposte was directed at the people commenting on my article and me, without bothering to read it.
But don't worry, I'm not suggesting my thoughts carry any more weight than the thoughts of others posting on here.
Regards
Simon
55. vacuouspolitician said...
Cheers Simon for the article...and welcome to the cheery way different points of view are greeted by the 'chosen few' on HPC.
Jar Spoon Spoon Jar.
56. 51ck-6-51x said...
The article started an interesting thread IMO. Thanks - pity I wasn't around really.
Airmiles said, "Er, if you regularly follow that Nationwide graph, you'll know it's constructed in such a way that it ALWAYS extrapolates back from the current price!"
- That's just incorrect, for example look at the trend two years ago.