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JohnG

Reversion To Mean - This Easter?

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Looking at the Nationwide graph on the home page it seems that we will be back at mean within the next two or three months, so just the overshoot to go then.

Another 18 months of falling nominal prices, followed by two or three years of stagnation?

What do the chartists on the site think?

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Looking at the Nationwide graph on the home page it seems that we will be back at mean within the next two or three months, so just the overshoot to go then.

Another 18 months of falling nominal prices, followed by two or three years of stagnation?

What do the chartists on the site think?

That's a trend line that includes the biggest boom in history. A trend that only starts/ends at the same point in a house price cycle would be more useful, the current one obviously doesn't include the future.

I'd guess a trend line nearer 1% would be more realistic over a number of complete cycles. Longterm US trends have been 0% (R.Schiller book).

If anyone has a timemachine, can you supply the trend line on the Nationwide graph from 2020. I bet we have a long way to get to that line.

VMR.

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yeah, exactly, if prices dip by another 5% then the trendline sinks a little bit lower as well, and if prices then dip by another 5% then the trendline will sink again & again [and so on, and so on]. but, of course, prices can't chase the trendline for indefinitely until prices are infinitely low.

i have thought for some time that the trendline on that chart is [for the purposes of a forum like this] misleading and a source of misconceptions, and as such should be removed.

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Looking at the Nationwide graph on the home page it seems that we will be back at mean within the next two or three months, so just the overshoot to go then.

Another 18 months of falling nominal prices, followed by two or three years of stagnation?

What do the chartists on the site think?

Do not fall for the smoke and mirrors

http://www.noelwatson.com/blog/PermaLink,g...e984ff9619.aspx

Nationwide1952-2008screenshot.JPG

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Looking at the Nationwide graph on the home page it seems that we will be back at mean within the next two or three months, so just the overshoot to go then.

Another 18 months of falling nominal prices, followed by two or three years of stagnation?

That chart doesn't include this month/last month. We're there already.

As for time span, this crash has been very different in a lot of ways. Whilst it can certainly be argued that the cause of this was that prices/debt levels were too high, the main technical driver for both the economic contraction and the price crash has been the sudden and savage withdrawal of credit to businesses and households.

This is completely different to the last crash, where more or less normal "pre crash" lending quantities were available to lend throughout, but demand was not there. This time around, demand has decreased, but lending constraints driven by reduced funding availability have further artificially decreased activity above and beyond the "normal" rate of demand decrease.

Which is why the timeline is different. A much faster/sharper decline than the previous ones.

There seem to be three common theories as to where we go from here.

One is that the overall crash pattern, in terms of price reduction from peak to trough, will fit that of the last crash, only that the timeline will continue to be shortened. Same peak, same trough, just shorter timeframe. On that basis, we have reached the mean.

The second is that the timeframe will remain the same, from peak to trough, but that as the fall has been faster, then the trough will be lower. In which case we still have a long way to go yet, and the mean will significantly re-adjust downwards.

The third theory is that as the primary driver of the crash to date has been a liquidity shortage, if significant liquidity is injected back into the system (via all the various proposed measures), that the downwards pressure will slow rapidly, and then stop. Leading to a lower trough, and a faster recovery. (plus significant inflation in all categories) In which case we have already passed where the future mean will be, and are some way into overshoot.

Personally, I think we've reached mean, or thereabout. But who knows what will happen this year.

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Hamish

No offence but you are in cloud cuckoo land.

Transactions are at an all time low. Until transaction volumes pick up there is only one way house prices are going. Have you looked at the excellent graphs on spline's website?

http://www.houseprices.uk.net/articles/pro...y_transactions/

Anyway lets revisit this in a year's time!!

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That chart doesn't include this month/last month. We're there already.

As for time span, this crash has been very different in a lot of ways. Whilst it can certainly be argued that the cause of this was that prices/debt levels were too high, the main technical driver for both the economic contraction and the price crash has been the sudden and savage withdrawal of credit to businesses and households.

This is completely different to the last crash, where more or less normal "pre crash" lending quantities were available to lend throughout, but demand was not there. This time around, demand has decreased, but lending constraints driven by reduced funding availability have further artificially decreased activity above and beyond the "normal" rate of demand decrease.

Which is why the timeline is different. A much faster/sharper decline than the previous ones.

There seem to be three common theories as to where we go from here.

One is that the overall crash pattern, in terms of price reduction from peak to trough, will fit that of the last crash, only that the timeline will continue to be shortened. Same peak, same trough, just shorter timeframe. On that basis, we have reached the mean.

The second is that the timeframe will remain the same, from peak to trough, but that as the fall has been faster, then the trough will be lower. In which case we still have a long way to go yet, and the mean will significantly re-adjust downwards.

The third theory is that as the primary driver of the crash to date has been a liquidity shortage, if significant liquidity is injected back into the system (via all the various proposed measures), that the downwards pressure will slow rapidly, and then stop. Leading to a lower trough, and a faster recovery. (plus significant inflation in all categories) In which case we have already passed where the future mean will be, and are some way into overshoot.

Personally, I think we've reached mean, or thereabout. But who knows what will happen this year.

I like the third theory. It's like a man jumping off a cliff asking the person at the bottom of the cliff to dig as fast as possible in the hope that it'll solve his immediate problem.

I agree that in the short term injecting liquidity will "help" the housing market. However the answer to rampant asset inflation cannot ever be more debt. It's fighting fire with petrol.

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Hamish

No offence but you are in cloud cuckoo land.

Transactions are at an all time low. Until transaction volumes pick up there is only one way house prices are going. Have you looked at the excellent graphs on spline's website?

http://www.houseprices.uk.net/articles/pro...y_transactions/

Anyway lets revisit this in a year's time!!

Roblpm,

Transaction volumes being at a record low actually supports the lack of liquidity theory.

Besides, I laid out three theories, and fully acknowedge the possibility that option two ends up being correct.

But the most telling thing, is that given how actively you're cheering on job losses in the scotland section, and given how frustrated you clearly are at the shortage of them so far, I'll probably have to write your comments off under the "Extreme Vested Interests" category.... But no offence. ;)

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If we accept that 3.5 times the average income is the long run average house price, we are still a long way from reversion to the mean let alone the bottom of the market which will be accompanied by a massive overshoot given our dire economic situation. It is also possible that we go through a period of declining average incomes.

This graph is up to date as of Q3 2008 based on Halifax data since 1983. I know that many take exception to their average household income. I have used the Halifax numbers for average income to keep everything consistent as 3.5x their income seems to map quite well to prices from 1983 to 2001. It does also reveal the two bubbles quite nicely.

Series 1 is the average house price. Series 2 is 3.5 times the average income.

Graph.jpg

post-16750-1232212068_thumb.jpg

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Wake up - you're still dreamng.

Sorry, a bit of a cryptic comment. Are you saying that the prediction that the average house price based on the Halifax index will fall to or below about GBP 125,000 is a dream?

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Sorry- let me clarify...

I think the people who try to predict based on projected trends are always on a hiding to nothing because they assume what happened before will happen again. The trend line on your graph is too flat, but to be fair maybe I misread where you were projecting out to as a result.

For at it's worth, I do think £125,000 is too optimistic. Closer £140k - Noel's above looks closer to where we'll be.

Fair enough. I think that my line represents an approximation of where the long run fair value might be. Markets wax and wane at times and bubble and crash at others.

I am certainly not projecting what will actually happen to prices based on 3.5x average income. It clearly isn't a good projection tool if we back test the last 25 years of data.

I do suspect that it is a reasonable long run mean and that there will be a lot of noise around it and that it might be the level to which markets revert both from the upside and the downside.

We only need another 12.5% drop from the most recent Halifax data to get to £140k. I am not sure that we are in the environment where the collapse will slow down just yet .......

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If we accept that 3.5 times the average income is the long run average house price, we are still a long way from reversion to the mean let alone the bottom of the market which will be accompanied by a massive overshoot given our dire economic situation. It is also possible that we go through a period of declining average incomes.

This graph is up to date as of Q3 2008 based on Halifax data since 1983. I know that many take exception to their average household income. I have used the Halifax numbers for average income to keep everything consistent as 3.5x their income seems to map quite well to prices from 1983 to 2001. It does also reveal the two bubbles quite nicely.

Series 1 is the average house price. Series 2 is 3.5 times the average income.

Graph.jpg

Nice chart. Do we not normally see peaks/bubbles undershoot the trendline before returning to it?

Thoughts on an undershoot and timeline to return to trend?

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Roblpm,

Transaction volumes being at a record low actually supports the lack of liquidity theory.

Besides, I laid out three theories, and fully acknowedge the possibility that option two ends up being correct.

But the most telling thing, is that given how actively you're cheering on job losses in the scotland section, and given how frustrated you clearly are at the shortage of them so far, I'll probably have to write your comments off under the "Extreme Vested Interests" category.... But no offence. ;)

theres plenty of liquidity. Its debt thats lacking.

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Sorry- let me clarify...

I think the people who try to predict based on projected trends are always on a hiding to nothing because they assume what happened before will happen again. The trend line on your graph is too flat, but to be fair maybe I misread where you were projecting out to as a result.

For at it's worth, I do think £125,000 is too optimistic. Closer £140k - Noel's above looks closer to where we'll be.

How about this trend?

usdebt.serendipityThumb.jpg

Difficult to predict the future?

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I reckon at least a further 15% fall this year, with 25% or more next year...

This thing is what 15 months old so far and some people think we'll hit bottom in 12 months time or thereabouts?

I.e. That we are over half way through? Barmy. We are only at the start imho. I bet things look alot worse in a years time, not better.

Edited by ader

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Nice chart. Do we not normally see peaks/bubbles undershoot the trendline before returning to it?

Thoughts on an undershoot and timeline to return to trend?

In the last mini-crash, the market undershot my assumed long run average by about 1/3. The peak was about 5x and it dropped down to about 3x.

Using the same proportional undershoot this time, the 5.8x peak may end up with an undershoot of about .8x or all the way down to 2.7x income which would drop the average price down to about 95k.

Another outcome is that the average price dropped to 3x income at the bottom of the last crash. That would put the average price at about 105k.

An outcome of somewhere between 95k and 105k does not look out of line to me assuming that incomes remain relatively flat for the next couple of years. If defaltion sets in and wages start to drop, all bets are off.

Again, I am applying the Halifax average income methodolgy consistently to the Halifax house price index. I do not claim that their average income numbers are correct.

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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