Tuesday, May 25, 2010
What impact does general price inflation have on house prices?
Money AM: US house prices fall
From the article "While the national, purchase-only house price index fell 3.1% from the first quarter of 2009 to the first quarter of 2010, prices of other goods and services rose 3.5%. Accordingly, the inflation-adjusted price of homes fell approximately 6.3% over the latest year." That suggests to me there might even be an inverse relationship...
Posted by mark wadsworth @ 04:46 PM (791 views) Add Comment
7 Comments
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1. icarus said...
The US housing market is the government, the policies of which (programmes for buyer-assistance, loan modification, foreclosure abatement and principal reduction, subsidies for first-time buyers, historically low interest rates, "easy-term" financing, and government-backed loans) neither enable the market to clear nor solve problems of lost equity and foreclosure. One WSJ article pointed out that government entities (mainly the Fed Housing Assoc and F&F) backed over 96% of new mortgages in the 1st quarter of 2010. All this to protect the balance sheets of banks (useless organisations since they aren't otherwise capitalised to extend credit). According to another WSJ article the foreclosure inventory is piling up at an alarming rate. There are 1.1 million foreclosed properties and another 4.8 million that are somewhere between being 60+ days in arrears and going through the foreclosure process. At current rates of foreclosure sales that's a nine-year backlog which banks are keeping off the market to keep up prices and the value of their balance sheets.
What most affects the US housing market? The political power of the banks.
2. tenyearstogetmymoneyback said...
Mark wrote "That suggests to me there might even be an inverse relationship"
A former colleague came to that conclusion in about 1988 in order to explain the boom back then.
Back in 1986 the people I bought my £24000 house off had a £600 video recorder !
The freezer I bought for £100 in 1986 still cost £100 twenty years later for the same make and size !
All the things like videos (/ DVD recorders) dropping to £100 mean people have more money to
spend on housing. Wait until a freezer costs £1000 and see how much people are prepared to spend
on a house then.
3. icarus said...
10 years - but our household doesn't buy many dvd players and freezers in a year.
4. Dontpanic said...
In 1975 I cold afford to buy a house in West London (£11000), on a salary of about £5k.....but i couldn't afford a washing machine!
5. mark wadsworth said...
@ Tenyears, indeed.
Nowadays you can get a fantastic flat screen telly for about a week's wages; thirty years ago it was a couple of months' salary for a top-of-the-range 26" colour set. If the relationship you observe is correct, then this illustrates yet again Ricardo's Law Of Rent. The Chinese non-party members are being enslaved at one side of the world and on the other side, the landlords and vendors are raking it in (even ignoring the fact that Chinese state banks were propping up all the reckless lending...)
6. tenyearstogetmymoneyback said...
icarus. I think Mark and myself are both trying to make the same point.
Someone setting up home will most likely have to buy all these items.
I have recounted my colleagues theory to many people. One person
who is now retired said that when they set up home (presumably in the
1960s) they (or more likely his wife) really wanted an automatic washing
machine so they bought one. It cost 10% of what they paid for the house !
Of course the house would have been cheaper in real terms as people knew
they had to spend a lot on all the things to go in it.
I would love to know the cost of equiping a house from different decades.
I have various old catalogues so might have an attempt myself ready for
next time this discussion occurs
7. icarus said...
10 years - US house prices rose at the rate of inflation (maybe inflation +1%) for decades until the bubble starting around 2000.