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kagiso

22 Post War Nationwide Bull Traps

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Seeing as Grumpy is sulking about my ideas about inflation/deflation, I thought I would cheer him up with one of my hard core picture posts.

Whilst digging around a while ago, I discovered one of the old Nationwide house prices against average earnings graphs, the ones they used to post before they realised that the dips might scare the horses.

The section of data that I found shows that the Nationwide were using something that correlates almost exactly to the National Statistics Office chained average earnings (LMNQ), but for some reason with a 35% uplift.

So I have cross-correlated with NW's other data sets, back to 1953 and forward to last month.

Data points are quarterly to 1990, monthly from 1991.

This gives the following graph showing house prices against average income:

bull_traps.jpg

Here is the crashy period (1969 onwards) with some charty type stuff added.

bull_traps_2.jpg

The following is of note:

The crash rate for the Barber ('74), Lawson and Brown booms is extraordinarily similar. (I presume the Healey boom is lower because Thatcher pre-empted the crash by destroying the UK economy at her own behest rather than waiting for the housing bubble to do it for her).

The current crash has only just dropped below the peak of the last crash - awful long way to go here folks.

Crashes in times of high inflation tend to bottom out at 3.5 times earnings - this is because people like Sibley and Hamish think prices are going up because nominal prices are going up, when in fact real prices are still going down.

Crashes in times of low inflation tend to bottom out at 3 times earnings.

QED, if we assume 4% annual earnings growth (until very recently this was very stable), then Nationwide house prices will drop from the current £154k to about 100k. Another 35% to go.

If deflation happens, and earnings growth has recently dropped to zero, then prices will go a whole lot lower.

And even on this scale, there where 22 post war bull traps.

If you look at nominal figures, there were a whole lot more. During the '74 crash there were no nominal negative months, during the '79 crash there were only two nominal negative months.

Full list of bull traps below:

55 Q2

57 Q1

58 Q1

58 Q2

59 Q2

68 Q1

68 Q2

69 Q1

69 Q4

77 Q1

77 Q2

82 Q1

82 Q2

May-91

Jun-91

Dec-91

Apr-92

May-92

Jan-93

Feb-93

Mar-93

Apr-93

Jun-93

Dec-93

Jan-94

Mar-94

Jul-94

Oct-94

Mar-95

Apr-95

Jul-95

Nov-95

Mar-08

Apr-08

Nov-08

Mar-09

Conclusion, assuming that inflation does not go above say 5% pa, if the Nationwide index rises for a full five months in a row, you probably should buy a house.

At this point you will get a bargain.

post-7856-1244323683_thumb.jpg

post-7856-1244323720_thumb.jpg

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<SNIP>

This gives the following graph showing house prices against average income:

bull_traps.jpg

Here is the crashy period (1969 onwards) with some charty type stuff added.

bull_traps_2.jpg

<SNIP>

The current crash has only just dropped below the peak of the last crash - awful long way to go here folks.

Crashes in times of high inflation tend to bottom out at 3.5 times earnings - this is because people like Sibley and Hamish think prices are going up because nominal prices are going up, when in fact real prices are still going down.

Crashes in times of low inflation tend to bottom out at 3 times earnings.

QED, if we assume 4% annual earnings growth (until very recently this was very stable), then Nationwide house prices will drop from the current £154k to about 100k. Another 35% to go.

If deflation happens, and earnings growth has recently dropped to zero, then prices will go a whole lot lower.

<SNIP>

Nice!

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Beautiful chart. Reminds me of a warm summers night in the Rocky Mountains with the moon shining off the lake like a million sparkling diamonds. Unfortunately it also reconfirms that the hard times have hardly even begun.

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you forget the paradigm shift that happened about 6 or 7 years ago. it's different this time.

That's what was said in the late 80's crash also.

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Seeing as Grumpy is sulking about my ideas about inflation/deflation, I thought I would cheer him up with one of my hard core picture posts.

Whilst digging around a while ago, I discovered one of the old Nationwide house prices against average earnings graphs, the ones they used to post before they realised that the dips might scare the horses.

The section of data that I found shows that the Nationwide were using something that correlates almost exactly to the National Statistics Office chained average earnings (LMNQ), but for some reason with a 35% uplift.

So I have cross-correlated with NW's other data sets, back to 1953 and forward to last month.

Data points are quarterly to 1990, monthly from 1991.

This gives the following graph showing house prices against average income:

bull_traps.jpg

Here is the crashy period (1969 onwards) with some charty type stuff added.

bull_traps_2.jpg

The following is of note:

The crash rate for the Barber ('74), Lawson and Brown booms is extraordinarily similar. (I presume the Healey boom is lower because Thatcher pre-empted the crash by destroying the UK economy at her own behest rather than waiting for the housing bubble to do it for her).

The current crash has only just dropped below the peak of the last crash - awful long way to go here folks.

Crashes in times of high inflation tend to bottom out at 3.5 times earnings - this is because people like Sibley and Hamish think prices are going up because nominal prices are going up, when in fact real prices are still going down.

Crashes in times of low inflation tend to bottom out at 3 times earnings.

QED, if we assume 4% annual earnings growth (until very recently this was very stable), then Nationwide house prices will drop from the current £154k to about 100k. Another 35% to go.

If deflation happens, and earnings growth has recently dropped to zero, then prices will go a whole lot lower.

And even on this scale, there where 22 post war bull traps.

If you look at nominal figures, there were a whole lot more. During the '74 crash there were no nominal negative months, during the '79 crash there were only two nominal negative months.

Full list of bull traps below:

55 Q2

57 Q1

58 Q1

58 Q2

59 Q2

68 Q1

68 Q2

69 Q1

69 Q4

77 Q1

77 Q2

82 Q1

82 Q2

May-91

Jun-91

Dec-91

Apr-92

May-92

Jan-93

Feb-93

Mar-93

Apr-93

Jun-93

Dec-93

Jan-94

Mar-94

Jul-94

Oct-94

Mar-95

Apr-95

Jul-95

Nov-95

Mar-08

Apr-08

Nov-08

Mar-09

Conclusion, assuming that inflation does not go above say 5% pa, if the Nationwide index rises for a full five months in a row, you probably should buy a house.

At this point you will get a bargain.

Very good and interesting post, thanks Kagiso.

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Very good and interesting post, thanks Kagiso.

every crash comes back at least to 3.5 x earnings that all we need to know for now. great chart. look forward to revisiting it when we are at 3.5 x

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The section of data that I found shows that the Nationwide were using something that correlates almost exactly to the National Statistics Office chained average earnings (LMNQ), but for some reason with a 35% uplift.

Thanks for that. Could you post links to your data sources?

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Thanks for that. Could you post links to your data sources?

Unfortunately not.

All the house price information can be collected at the Nationwide website here:

http://www.nationwide.co.uk/hpi/historical.htm

Under UK series.

The LMNQ Average Earnings data can be found here:

http://www.statistics.gov.uk/STATBASE/tsdataset.asp?vlnk=392

In the past, Nationwide used to produce their own graph showing prices over earnings. The earnings figure they used is very closely correlated to the LMNQ series, but includes a factor of 35% somewhere.

They removed this graph a couple of years ago, I believe because it would have shown how ridiculously over priced houses were at the height of the boom.

I have retrofitted data in my own spreadsheet to update a reconstituted version of the old Nationwide graph.

Anybody who wants to can take the two sources above to produce an equivalent to my graph, however there is a big issue of basing of the data.

The LNMQ series is a chained data series with an arbitary definition of Y 2000 = 100 as the baseline for the data series.

The LNMQ series does not give actual values for average earnings.

So anybody who produces a graph as I have done has to fix a value for current earnings.

I fixed my earnings point by retroactively working out where Nationwide fixed their earnings point. The 35% difference between Nationwide's chain index and the LNMQ suggests possible errors in Nationwide's fix.

So I have total confidence in the shape of my graphs, and the relative positions of house prices to earnings over the years, and so I have total confidence in my predictions of a fall to approx £100k.

However I don't have a total confidence in the absolute values for the ratios, or the implied underlying average wages.

If I, or someone else has the time, then the way forward would be to take the last average earnings value given by NSI, and reverse fit the LNMQ chain to the data each month, but until I can think of a better way of organising my spreadsheet this would be quite laborious.

Edit, something I haven't made clear, the LNMQ series only goes back to 1990, the Nationwide series went back to the 50s. I don't know what the Nationwide were using prior to 1990, but the very close correlation with the LNMQ series over the years when there is common NSI and Nationwide data strongly suggests that it was an equivalent predecessor of earnings produced by the NSI.

Edited by kagiso

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In the past, Nationwide used to produce their own graph showing prices over earnings. The earnings figure they used is very closely correlated to the LMNQ series, but includes a factor of 35% somewhere.

They removed this graph a couple of years ago, I believe because it would have shown how ridiculously over priced houses were at the height of the boom.

Right, information is power.

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Guest absolutezero
Notice how the mad & stupid bulls keep well clear of any thread with hard data in it?

In general they do keep clear but sometimes they come in and say something like "it's different this time", but can't back that up.

Ask them direct questions about the data and they vanish like a shot.

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I'd missed this one in the blizzard of recent "we're in a bull trap" posts.

This one is interesting because it doesn't seem to show a bull trap this time around.

I think the Nationwide earnings info may be based on average male earnings, hence the uplift.

I'm not convinced that a "bull trap" is a valid concept in a graph of house prices vs earnings - surely earnings themselves vs inflation would have their own cyclical curve. The dip below the supposed housing "bull trap" could be the earnings "bull trap" putting the ratio artificially low.

And again, the blip in the last crash, around 91 is closer to the bottom than the top. Do we think this is the case today or are things different this time round?

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Notice how the mad & stupid bulls keep well clear of any thread with hard data in it?

Yes, not even a sniff of a whiff of a bull here. More to the point, why are there any bulls? I mean those two graphs say it all. I suggest any new members (or old for that matter) asking if they should buy now just take a damn good look at the graphs here! They give me a nice warm feeling as well.

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No sign of Dumbfuk McTavo, Clownibly, LondonToFukAll, Rinobrain, Dumberius, endofsmush2.

This is the trend of the current bulls, avoid threads with fact backed data.

winesmiley.gif

Edited by Eiji

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No sign of Dumbfuk McTavo, Clownibly, LondonToFukAll, Rinobrain, Dumberius, endofsmush2.

This is the trend of the current bulls, avoid threads with fact backed data.

winesmiley.gif

I provided a link to the thread for Dumberius and challenged for a comment but do not expect one. Will be interesting to see what sh1te McSpivish comes out with.

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No sign of Dumbfuk McTavo, Clownibly, LondonToFukAll, Rinobrain, Dumberius, endofsmush2.

This is the trend of the current bulls, avoid threads with fact backed data.

winesmiley.gif

Hello?

I'm on Bruce Banner's libellous list.

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This one is interesting because it doesn't seem to show a bull trap this time around.

Isn't that just because the data for last month (and the next 2) are just not in the graph yet? If this is a bull trap then its prob not just one month of Nationfried and Haxifucs rises but a few and this data has yet to be fed in (obviously). There is really no denying we are either in a bull trap or a 'this time round its different' scenario. I know which way i'd bet because from where I stand all I can see is more of the same debt, job losses and reduced hours / wages which for me doesn't amount to much of a recovery. But if I were a bank (which clearly I am not) I would REALLY like to have all that hard earned cash savers have swilling around in their accounts to balance up my books and I'd be doing all I could to tempt people out of their cubbie holes with their cash (I re-iterate I am not a banck mostly because I am not a complete and total tozzer)

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Thanks for the anlysis, it's very useful.

Do you think the Nationwide data uplifts 35% to account for an additional member of the household's earnings? Possibly a part time worker or lower paid member of the household. Given the increase in two income households over recent years - in part induced by increasing house prices - maybe that is the correct wage level to use.

I am a bear, but have my doubts that there is that much more of the fall to go, although I can't see a take off in prices any time soon.

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