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Guest_tiburonsmoke_*

Popular Average House Price Graph Is Misleading...

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Before I make my point, I want to state that I'm of the belief that we are experiencing a bull trap. In my opinion, a gradual decline in house prices is what we all need. Before the crash, prices were ridiculous, and they're only slightly less ridiculous now.

Having said that, I find it extremely disconcerting that the graphs the industry pundits are publishing frequently show false zeros. Even a tiny fluctuation in prices can look shocking if you crop to just the top portion of the graph. This can fool you into thinking that prices have dropped more drastically than they really have, and trigger your buying impulse. Funny, that.

I've had a closer look at the Nationwide's average house prices graph.

I'm not a whiz with Photoshop, but I've done a quick - estimated by eyesight alone - adjustment to the graph to show a true zero on the house price axis. I've attached it below.

It's less shocking than the version published by the Nationwide, but I still see the likelihood of a big trough to come.

I only did this roughly, but if anyone would like to do it properly, or with other graphs, I'd love to see the results.

Compare with original as posted here:

http://www.housepricecrash.co.uk/graphs-av...house-price.php

Tiburonsmoke (sitting and waiting...)

Nationwide_graph_given_rough_zero_by_hand.jpg

post-21583-1246876861_thumb.jpg

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It still looks like a pretty big peak.

For a laugh, try fitting a line to the troughs in the series - that'll get rid of any bullishness.

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It's less shocking than the version published by the Nationwide, but I still see the likelihood of a big trough to come.

Spot on.

Are you sure that you are a bull?

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I don't quite understand. The reason nobody uses zero is because in the timeframe it never reached that low.

So a graph can show you more information in the same space.

The trend moves upwards in the boom and downwards in the crash so it's not really useful until afterwards.

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Having said that, I find it extremely disconcerting that the graphs the industry pundits are publishing frequently show false zeros.

It is always important to notice "false zeros", so this post is welcome.

But it is not a sneaky underhand trick. It is standard practice amongst statisticians to cut off the lower half of the graph if, as Tom Peters points out, it contains no data points.

The reader should always check the axis of every graph to see if it is drawn to zero or not. Unfortunately I think this point is rarely made in school maths lessons... at my school, I seem to remember being told that all graphs should be drawn to zero. However that is not considered necessary in financial / statistical circles.

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It does put some scale to the two peaks (the 07 one and the 89 one) ... I have read before comments like the 07 peak makes the 89 one look like a mole hill etc etc but actually even though both booms and both crashes were triggered by very different things it is truly scary how very SIMILAR they are.

89 peak vs trend 134% higher.... 07 peak vs trend 131% higher.

89 peak to back to trend 18 months ( back pretty much at trend Jan 91).... 07 peak back to trend 18 months ( back pretty much to trend jan 09).

Clearly there are lots of other points within the graphs and I am not a huge convert to the theory that 07 will mirror 89 BUT when you you look at it its clear from the chart that the overvaluation was of a very similar scale vs trend and the correction has been similar in terms of time ( this of course ignores all discussion about other forms of valuation).

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It does put some scale to the two peaks (the 07 one and the 89 one) ... I have read before comments like the 07 peak makes the 89 one look like a mole hill etc etc but actually even though both booms and both crashes were triggered by very different things it is truly scary how very SIMILAR they are.

89 peak vs trend 134% higher.... 07 peak vs trend 131% higher.

89 peak to back to trend 18 months ( back pretty much at trend Jan 91).... 07 peak back to trend 18 months ( back pretty much to trend jan 09).

Clearly there are lots of other points within the graphs and I am not a huge convert to the theory that 07 will mirror 89 BUT when you you look at it its clear from the chart that the overvaluation was of a very similar scale vs trend and the correction has been similar in terms of time ( this of course ignores all discussion about other forms of valuation).

Remember that those graphs are inflation adjusted so any trend needs to reflect real economic growth and increases in real wages.

FWIW I don't accept the trend line included in the OP. I don't see how he's come up with his trend line but it does look like its deliberately aimed to end at current prices. More to the point even if it is a reasonable interpretation of the data I would argue that the data is so heavily skewed by the two bubbles that any trend that we try to draw from it is going to be pretty unreliable.

As mentioned earlier, try drawing a trend line along the very bottom of the troughs and see where that takes you; my money's on us ending up pretty near that.

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Remember that those graphs are inflation adjusted so any trend needs to reflect real economic growth and increases in real wages.

FWIW I don't accept the trend line included in the OP. I don't see how he's come up with his trend line but it does look like its deliberately aimed to end at current prices. More to the point even if it is a reasonable interpretation of the data I would argue that the data is so heavily skewed by the two bubbles that any trend that we try to draw from it is going to be pretty unreliable.

As mentioned earlier, try drawing a trend line along the very bottom of the troughs and see where that takes you; my money's on us ending up pretty near that.

As I said there are loads of ins and outs.. I did my calcs off the actual data so its nothing to do with the redrawing of the graphs.... the two peaks and the two declines are really that similar vs trend (accepting as you say that trend is in part influenced by events)...... I've always said and I continue to believe this that there is a chance the 2009 onwards pattern will look very different from what we have seen before.... anything of course is possible but personally while the stats etc may give good support to your view that the drop will turn out in line with previous troughs I am not a great believer ... I am sticking to a 30-35% decline in total which is a long way above where the trend line would be be drawn through the troughs.

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I'm no economist, but can that trend line even be close to accurate?

To me it looks like it's curving upwards, meaning that prices should increase at an exponential rate?

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Remember that those graphs are inflation adjusted so any trend needs to reflect real economic growth and increases in real wages.

FWIW I don't accept the trend line included in the OP. I don't see how he's come up with his trend line but it does look like its deliberately aimed to end at current prices. More to the point even if it is a reasonable interpretation of the data I would argue that the data is so heavily skewed by the two bubbles that any trend that we try to draw from it is going to be pretty unreliable.

As mentioned earlier, try drawing a trend line along the very bottom of the troughs and see where that takes you; my money's on us ending up pretty near that.

I think he has just lifted the trend line (along with the rest of the graph) from this site. All he's done is extend the y-axis down to zero. The trend line on the graph on this site also ends at current prices. It's interesting (although probably a coincidence) that there is a point of inflection when prices in both the last crash and this crash hit the underlying trend. It's as if it triggers some buying activity - maybe the last chance for the bulls to lose their money? :rolleyes: .

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I'm no economist, but can that trend line even be close to accurate?

To me it looks like it's curving upwards, meaning that prices should increase at an exponential rate?

Thats the million dollar question for me - looks all like ohms law

EDIT - oooops, not ohms law, its something else, can remember what it was, basically it increase expodentially until it can not go any higher because technology doesnt allow it too - gonna bug me all night now what it was..................

edit edit - got it Moores Law - so as long as you buy on trend or below, it will always go up - no boom or bust here..move along

Edited by Pearshape

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The curvature of the graph will straighten out over the next few years and maybe even turn downwards, as it is based on a fixed range of years.

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I prefer the graph when it went back to the fifties, the overall trend line was lower then too. Shorten the time-line increase the trend ...

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I'm no economist, but can that trend line even be close to accurate?

To me it looks like it's curving upwards, meaning that prices should increase at an exponential rate?

Trend is a mathematical construct - it represents nothing in real life. You can adjust this (or any other trend) by changing the data inputs. MS Excel has a "trend" function which will allow you to construct a similar chart based on whatever data you wish to put in.

If you then double the error by extrapolating the trend forward to predict the future you are in the sort of territory one might find in the tabloid press such as the Daily Mail immigration "statistics".

Trend is a useful rule of thumb (nothing more) to see how a particular set of data has evolved over time. This is a tool for a professional analyst (like myself) to try to correlate the mathematic trend with the inputs or variances that the market has seen. The process is subjective and relies on the analyst's skill and objectivity. Sadly we analysts are human and therefore not totally objective. We have our own theories that we think are "better" or more "right" than our competitors. We seek out data to prove us right. This is known as cognative dissonance.

Never make the mistake of looking at a trend line, particularly one who's data points you don't know, and extrapolating it forward to guess the future. Or if you must (and you will 'cos you're human) at least having done something you know to be wrong then seek out some other analysis to compare with it. A fatal error (IMHO) would be to base the single biggest financial "gamble" of your life on such a shakey basis :D

Causality is more important than trend in asset valuation. Look there if you want the best guess......

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As I said there are loads of ins and outs.. I did my calcs off the actual data so its nothing to do with the redrawing of the graphs.... the two peaks and the two declines are really that similar vs trend (accepting as you say that trend is in part influenced by events)...... I've always said and I continue to believe this that there is a chance the 2009 onwards pattern will look very different from what we have seen before.... anything of course is possible but personally while the stats etc may give good support to your view that the drop will turn out in line with previous troughs I am not a great believer ... I am sticking to a 30-35% decline in total which is a long way above where the trend line would be be drawn through the troughs.

Can you give me any reason to believe that, in the light of the current economic and fiscal disaster this country is experiencing, the trough for the current crash will be a long way above the troughs for previous crashes?

How do you think the housing market will react to 3m unemployed, basic rate income tax up to 25%, VAT up to 20% and £100bn in public sector spending cuts?

In my view something ITRO of 40% falls are needed simply to return to "fair" value. Given the gargantuan f*** up The Cretin Brown has made of the country as a whole and govenment finances in particular an undershoot of between 10% - 20% would seem likely.

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Can you give me any reason to believe that, in the light of the current economic and fiscal disaster this country is experiencing, the trough for the current crash will be a long way above the troughs for previous crashes?

...

The stupidity of the public is one reason to believe this. If people continue to buy and sell at the current level then there will be no further falls. People will assume their money is "safe as houses" in property whilst it is up sh1t creek in one of the many bankrupt banks.

Further falls rely on people selling at a loss. Few people want to do that. Some will have to but many will not, they will wait until the nominal value has returned to 2007 levels and their failure to understand the difference between real and nominal prices will allow their self delusion to accept they have not made a "loss".

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The stupidity of the public is one reason to believe this. If people continue to buy and sell at the current level then there will be no further falls. People will assume their money is "safe as houses" in property whilst it is up sh1t creek in one of the many bankrupt banks.

Further falls rely on people selling at a loss. Few people want to do that. Some will have to but many will not, they will wait until the nominal value has returned to 2007 levels and their failure to understand the difference between real and nominal prices will allow their self delusion to accept they have not made a "loss".

At the end of the day the prices will be set by those who are buying and selling; no matter how stupid the public they won't be willing or able to pay inflated prices with higher taxes, mass unemployment and shrinking gov't spending.

And let's not forget interest rates. What effect will half a trillion pounds plus of government borrowing have on long term interest rates? Will we go back to base rates of 5% or will it be 8% or 10%?

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At the end of the day the prices will be set by those who are buying and selling; no matter how stupid the public they won't be willing or able to pay inflated prices with higher taxes, mass unemployment and shrinking gov't spending.

And let's not forget interest rates. What effect will half a trillion pounds plus of government borrowing have on long term interest rates? Will we go back to base rates of 5% or will it be 8% or 10%?

I agree but there is no-one buying or selling right now. You only asked for an explanation not a forecast ;)

Interest rates are about 5-6% now in reality. Average credit card APR is in excess of 30% The base rate will have to change at some point to counter the push from QE and I would think to maybe 8+% if they are to have the required "cooling" effect.

If you feed this into the model it is entirely possible that the real estate market will stabilise in the short term and average house prices hold steady (I think flats may fall a bit more as the BTL market continues to suffer as a result of the late entry speculators killing off the investment yield). In the medium term your observations on the economy will feed through. Maybe this time next year. At that point there will be a second crash.

If this comes to be the UK will probably be very badly hit. The OECD say the UK will not perk up next year but other countries will. Sterling may fall again. That is a double kicking if viewed from here in the Eurozone (which has its own problems).

Conversely foreign investment into UK real estate may grow as the pound falls (some of that already I think).

Either way it is, IMHO, a huge gamble right now. I am currently trying to persuade a friend who wishes to move not to keep their current property to "wait for the market to pick up", advice from the EA and IFA/Mortgage Sharks. Sadly the press continues to print that London prices are back on the up again. My friend is buying at £440K To me that's too big a gamble - she could (and probably will) lose the equivalent of her pension if it goes wrong.

10-20% of £150K isn't enough to get bothered over, especially over 10+ years, so for many people buying now is the right thing to do. Personally I think prices will halve from where they are now which will keep me out the UK market for as long as it takes for me to change my mind or for the correction to take place as we wish to buy in London and so will inevitably be spending a lot more than the national "average" :(

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Before I make my point, I want to state that I'm of the belief that we are experiencing a bull trap. In my opinion, a gradual decline in house prices is what we all need. Before the crash, prices were ridiculous, and they're only slightly less ridiculous now.

Having said that, I find it extremely disconcerting that the graphs the industry pundits are publishing frequently show false zeros. Even a tiny fluctuation in prices can look shocking if you crop to just the top portion of the graph. This can fool you into thinking that prices have dropped more drastically than they really have, and trigger your buying impulse. Funny, that.

I've had a closer look at the Nationwide's average house prices graph.

I'm not a whiz with Photoshop, but I've done a quick - estimated by eyesight alone - adjustment to the graph to show a true zero on the house price axis. I've attached it below.

It's less shocking than the version published by the Nationwide, but I still see the likelihood of a big trough to come.

I only did this roughly, but if anyone would like to do it properly, or with other graphs, I'd love to see the results.

Compare with original as posted here:

http://www.housepricecrash.co.uk/graphs-av...house-price.php

Tiburonsmoke (sitting and waiting...)

Nationwide_graph_given_rough_zero_by_hand.jpg

Very few people pay cash for their property, so the standard graph does show more accurately what happens to people's equity.

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I'm no economist, but can that trend line even be close to accurate?

To me it looks like it's curving upwards, meaning that prices should increase at an exponential rate?

But that would be normal for anything where the price increases over a long period of time, the graph is effectively misleading because over that timeframe it should be logged which will show actual comparitive increases YonY rather than absolute value increases which will naturally get much larger relative to one another the longer the dataset is

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