Real V Nominal Property Crash

[Guest_ringledman_*]

Many on here expect a 50% Nominal housing crash.

I just don't buy it.

Property is clearly overvalued by the order of price to earnings and dividend yields against the historical.

Property also usually bottoms out on a yield much lower than the historical average of 7% or so.

Nonetheless with 'negative interest rates' set to last the next decade according to Faber, and in the inflationary world in which we live-

- We will unlikely see a massive nominal fall in property prices.

Property also historically (with the exception of the overbuilt USA market recently) usually crashes through 'real' term inflation adjusted terms.

This is what I see, as occured in Germany after reunification. Nominal prices fell 10% or so yet property halved in real terms over the decade.

It will be a long slog regression to the mean for property values over the next decade IMO.

Nominal falls of say 10-15% over the next 2-3 years but the real crash will be much slower and last much longer.

Edited August 10, 2010 by ringledman

[fellow]

- We will unlikely see a massive nominal fall in property prices.

I'm already seeing it.

[the_duke_of_hazzard]

Real price falls are the only thing that matters.

[fellow]

Inflation actually causes house prices to fall in nominal terms.

[Blue Nose Bear]

Many on here expect a 50% Nominal housing crash.

I just don't buy it.

Property is clearly overvalued by the order of price to earnings and dividend yields against the historical.

Property also usually bottoms out on a yield much lower than the historical average of 7% or so.

Nonetheless with 'negative interest rates' set to last the next decade according to Faber, and in the inflationary world in which we live-

- We will unlikely see a massive nominal fall in property prices.

Property also historically (with the exception of the overbuilt USA market recently) usually crashes through 'real' term inflation adjusted terms.

This is what I see, as occured in Germany after reunification. Nominal prices fell 10% or so yet property halved in real terms over the decade.

It will be a long slog regression to the mean for property values over the next decade IMO.

Nominal falls of say 10-15% over the next 2-3 years but the real crash will be much slower and last much longer.

Did you buy in the last 18 months or so?

I only ask as this is the sort of BS normally spouted by the (latest term) 'Sucker Rally' brigade, more commonly known as the Bull Trap.

[Guest_ringledman_*]

Did you buy in the last 18 months or so?

I only ask as this is the sort of BS normally spouted by the (latest term) 'Sucker Rally' brigade, more commonly known as the Bull Trap.

I bought a modest sized place in 2004 and don't plant to buy again until property has fallen a lot more in real terms (i.e 4-5 years away at least).

The facts speak for themselves. Property is illiquid and unless interest rates rocket, people will not sell at a loss. They will rather hang on in the belief that their property is not falling nominally without realising that their property is falling in real terms.

The emperical evidence foor property markets is that they crash over a very long time and in real terms.

The real BS is from muppets spouting what they want to occur rather than what will likely occur.

You will be waiting a long time to see a nominal crash in the order that property is overvalued by. Read my original post before talking s***e about me ramping up the property market.

Edited August 10, 2010 by ringledman

[Blue Nose Bear]

I bought a modest sized place in 2004 and don't plant to buy again until property has fallen a lot more in real terms (i.e 4-5 years away at least).

The facts speak for themselves. Property is illiquid and unless interest rates rocket, people will not sell at a loss. They will rather hang on in the belief that their property is not falling nominally without realising that their property is falling in real terms.

The emperical evidence foor property markets is that they crash over a very long time and in real terms.

The real BS is from muppets like yourself spouting what you want to occur rather than what will likely occur.

You will be waiting a long time to see a nominal crash in the order that property is overvalued by. Read my original post before talking s***e about me ramping up the property market.

QED

[Guest_ringledman_*]

QED

My view is based on the historical evidence of previous property cycles and based upon the macro fundamentals of out time.

Your view is based on little more than a 'wish' for all property owners and investors to be punished hard regardless of the situation being created by the BoE and government.

If you have an solid arguments for a large (30%+ nominal crash) over the next 2 years taking us back to the 'cheap/ undervalued' situation of the late 90s 'then please present it.

It will take time. A decade to get to this position of undervalued property values. That's reality folks.

Edited August 10, 2010 by ringledman

[Guest_ringledman_*]

It is interesting to note that the only 2 property markets in the world that are truely 'undervalued' are Germany and Japan.

http://www.economist.com/node/16542826?story_id=16542826

How many years since they started crashing?

Gonna hold off buying for 20 years?

Going to keep that deposit in cash and bonds for the decade or two wait?

Edited August 10, 2010 by ringledman

[Blue Nose Bear]

My view is based on the historical evidence of previous property cycles and based upon the macro fundamentals of out time.

Your view is based on little more than a 'wish' for all property owners and investors to be punished hard regardless of the situation being created by the BoE and government.

If you have an solid arguments for a large (30%+ nominal crash) over the next 2 years taking us back to the 'cheap/ undervalued' situation of the late 90s 'then please present it.

It will take time. A decade to get to this position of undervalued property values. That's reality folks.

Please do not presume to tell me what my views are, as it really does make you look like a complete and utter tool.

In response to post 9, much more interesting is the two most presently 'overvalued' property markets in the world.

Don'tcha think?

[Panda]

http://www.mortgageguideuk.co.uk/blog/uk-housing-market/uk-house-prices-real-and-nominal/

We have two types of inflation, cost and wage. We are seeing plenty of cost, and will see lots more of cost. Whereas, we will not see much wage inflation, very similar to Japan. So for me its....................

House stagnate for the next ten years, maybe an actual fall in price wise to the tune of 15% to 20%, banks would fall over any more, their balance sheets would be crippled.

Now inflation, lets say we see wage inflation at 3% per annum for the next ten years, i am being generous, so thats say 40% over the next ten years.

Now cost inflation i reckon at a guess double over the next ten years, 100%, petrol, gas, electricity, food essentials, yes double.

So a £100k house today, maybe a £90k house in ten years............A £20k a year wage, maybe £28k in ten years................A loaf of bread, £1.50 today, maybe £3.00 in ten years.

So a house relative to a loaf of bread, then a hundred percent plus fall, a house relative to a wage then a fifty percent fall.

[scottbeard]

I bought a modest sized place in 2004 and don't plant to buy again until property has fallen a lot more in real terms (i.e 4-5 years away at least).

I don't understand your logic.

If you think you're in for 4-5 years of bumper pay rises and house prices won't fall much in nominal terms, why not take out a big mortgage that will be child's play to repay in 4-5 years' time?

Alternatively, if you think retail prices will rise a lot over the next 4-5 years but your wages won't, isn't that exactly what would cause a big nominal HPC (as well as real)? You say people aren't willing to sell at a nominal loss, but they did in 1990 and 2008 - because they had to when they couldn't afford the mortgage.

To me the only reasons NOT to buy a house now (if you can afford it!) are that you don't want one or you think it will be cheaper in NOMINAL terms soon.

[Guest_ringledman_*]

http://www.mortgageguideuk.co.uk/blog/uk-housing-market/uk-house-prices-real-and-nominal/

So a £100k house today, maybe a £90k house in ten years............A £20k a year wage, maybe £28k in ten years................A loaf of bread, £1.50 today, maybe £3.00 in ten years.

So a house relative to a loaf of bread, then a hundred percent plus fall, a house relative to a wage then a fifty percent fall.

Exactly.

Property will crash in real terms over the decade and crash hard.

Nonetheless, with 'negative rates' ensuing for this decade there is not the mechanism for property to crash nominally.

Faber recokons we will have as high inflation this decade as we had in the 70s.

Interest rates may be lower but the difference between interest rates and inflation will be just as high.

So a 3% interest rate and 6% inflation rate in the 2010s is just as inflationary if not more so than a 10% interest rate and 15% inflation rate in the 1970%.

In such an environment property will be propped up nominally but less so in real terms. This will result in a long drawn out and slow property crash.

So what does one do?

Either buy at 'fair value' some 4-5 years away or buy at an 'undervalued' price some 10-20 years away.

The property boom was so large that a correspondingly large crash must ensue. However the powers that be will delay and prolong that crash from occuring in nominal terms.

The key decision is how to store one's 'deposit' over this period. holding in cash and bonds could prove a bad move. One may only see the value of the cash and bonds fall at the same or less than the real property crash but its high risk IMO.

Rather a better strategy is equities and a small percentage in commodities that can raise prices whilst waiting for the long drawn out buying opportunity to arise.

Edited August 10, 2010 by ringledman

[Guest_ringledman_*]

I don't understand your logic.

If you think you're in for 4-5 years of bumper pay rises and house prices won't fall much in nominal terms, why not take out a big mortgage that will be child's play to repay in 4-5 years' time?

As I said I think we will see some nominal price falls over the next 2-3 years, say 10-15%.

For this reason I wouldn't buy a large house and correspondingly a large mortgage over the next 2-3 years until those nominal falls are seen out.

Likewise I believe there is more opportunities for growing a deposit in high yielding equities the next few years than any other asset.

Also I am not sure if I wish to remain in the UK long term with better opportunites abroad (especially for raising a family).

The point I make is we are not going to get to fair value on property let alone undervalued for many many years to come. On this basis posters here need to decide whether to wait out buying for the long term or buy an overvalued asset and get on with their lives.

Many posters here say what they want to occur rather than what is the likely outcome.

[easy2012]

In such an environment property will be propped up nominally but less so in real terms. This will result in a long drawn out and slow property crash.

Either buy at 'fair value' some 4-5 years away or buy at an 'undervalued' price some 10-20 years away.

The property boom was so large that a correspondingly large crash must ensue. However the powers that be will delay and prolong that crash from occuring in nominal terms.

The key decision is how to store one's 'deposit' over this period. holding in cash and bonds could prove a bad move. One may only see the value of the cash and bonds fall at the same or less than the real property crash but its high risk IMO.

Rather a better strategy is equities and a small percentage in commodities that can raise prices whilst waiting for the long drawn out buying opportunity to arise.

Total agree. Japan property aren't undervalue - it is the long drawn out crash. A 2 bed house in Tokyo Prime district ( I read somewhere) was $3.5m in 1990

and was sold for $800,000 in 2005. 2 Bed... that is not undervalue in any sense and that took 20 years.

BoE (or just the MPC) has show clear contempt to the paper that it prints and holding cash (GBP) and GBP bonds is a very bad idea.

[libspero]

Nominal falls of say 10-15% over the next 2-3 years but the real crash will be much slower and last much longer.

My current expectation is identical, my reasoning is perhaps marginally different.

• We learned after the last crash that the government CAN control price drops.. not so much through monetary policy IMO but through stripping supply from the market (subsidising the mortgage payments of those who can't afford them in order to keep the houses off the market), and by forcing mortgage lending through government owned banks.

• We know that large drops will undermine the strength of the banks, which will simply not be allowed to happen while it is preventable

• I believe the government are very well aware that the housing market is distorted and needs to correct

It is also my (finger in the air) estimate that banks could take about a 10-15% hit before they start to buckle again, so I think that is how far they will be allowed to fall. If they drop too much or too quickly the government will simply restrict supply and increase demand again.

Slow steady unwinding is the order of the day I feel.

Edited August 10, 2010 by libspero

[OnlyMe]

My current expectation is identical, my reasoning is perhaps marginally different.

• We learned after the last crash that the government CAN control price drops.. not so much through monetary policy IMO but through stripping supply from the market (subsidising the mortgage payments of those who can't afford them in order to keep the houses off the market), and by forcing mortgage lending through government owned banks.

• We know that large drops will undermine the strength of the banks, which will simply not be allowed to happen while it is preventable

• I believe the government are very well aware that the housing market is distorted and needs to correct

It is also my (finger in the air) estimate that banks could take about a 10-15% hit before they start to buckle again, so I think that is how far they will be allowed to fall. If they drop too much or too quickly the government will simply restrict supply and increase demand again.

Slow steady unwinding is the order of the day I feel.

Last two years has flushed savers' cash into the system and now there is real damage being done to the spending power of those who were not so foolish to be drawn into the banker's trap.

Over the next few years and longer long term plans will have to be made to secure the value of that money - it will increasingly go abroad to growing economies not those stuck in mutli-decade flunks with no will to purge the problem.

All that has happened is that the economic dirty protest of high spending and high debt has been smeared across the exverybody bar the top few percent - longer term this will have really rather more severe side effects than the masked manipulations of the last couple of years indicate.

[roadtoruin]

My current expectation is identical, my reasoning is perhaps marginally different.

• We learned after the last crash that the government CAN control price drops.. not so much through monetary policy IMO but through stripping supply from the market (subsidising the mortgage payments of those who can't afford them in order to keep the houses off the market), and by forcing mortgage lending through government owned banks.

• We know that large drops will undermine the strength of the banks, which will simply not be allowed to happen while it is preventable

• I believe the government are very well aware that the housing market is distorted and needs to correct

It is also my (finger in the air) estimate that banks could take about a 10-15% hit before they start to buckle again, so I think that is how far they will be allowed to fall. If they drop too much or too quickly the government will simply restrict supply and increase demand again.

Slow steady unwinding is the order of the day I feel.

Assume by the last crash here you're referring to recent 2008-2009 15% nominal drop rather than 1989-1995. For the former, in the event of double-dip repeat falls, hugely exacerbated by unemployment, I don't think the Govt can possibly repeat the support mechanisms (mortgage rescue), so nominal falls could easily be 20-30% over a couple of years. In 1989-95 unlike the OPs views of the past, nominal drops in some places were very high (I saw >50% NOMINAL fall on my flat in SE London) on top of high interest rates, taking real price drops to 70-80% in badly affected regions.

[libspero]

Last two years has flushed savers' cash into the system and now there is real damage being done to the spending power of those who were not so foolish to be drawn into the banker's trap.

Over the next few years and longer long term plans will have to be made to secure the value of that money - it will increasingly go abroad to growing economies not those stuck in mutli-decade flunks with no will to purge the problem.

Hi OM, I think I see what you are saying.. money coaxed away from banks will flow into assets and other high growth investments abroad.

While it cuts investment in the UK does that not still makes us more wealthy? If you invest say your pension abroad.. it returns 10% a year, but then you draw that pension in the UK and spend the gains here into the economy. There is a delay, but is the net result not that more wealth returns to the country in the long run?

It is a macro economic issue that to be honest I've not really considered in great depth.

I think it is a good point, but I'm not sure how it effects the housing market or whether that was your point or not. Banks are being recapitalised (as I understand it) because of the huge interest rate spread. My logic is that low rates mean wide margins without the risk of wide spread default. This results in debt being paid down and banks making profits. Profits mean banks can take bigger hits against their assets (yep, bank profits are a good thing for HPC in my opinion), which means TPTB can allow house prices to slip without endangering the banking sector..

The money washed into the markets by the low interest rates will eventually return home to be spent, thus no net loss (?)

[libspero]

Assume by the last crash here you're referring to recent 2008-2009 {Yes correct, apologies, I should have said the first part of this crash] 15% nominal drop rather than 1989-1995. For the former, in the event of double-dip repeat falls, hugely exacerbated by unemployment, I don't think the Govt can possibly repeat the support mechanisms (mortgage rescue), so nominal falls could easily be 20-30% over a couple of years. In 1989-95 unlike the OPs views of the past, nominal drops in some places were very high (I saw >50% NOMINAL fall on my flat in SE London) on top of high interest rates, taking real price drops to 70-80% in badly affected regions.

You could be right.. I'm just not sure we wouldn't see some kind of (global) mass money printing operation if it got to that stage. The governments are so keen to prevent deflation I think they'd almost view an inflationary depression as a preferable outcome. If it did pan out as you suggest it really would be brown trousers time

Edited August 10, 2010 by libspero

[OnlyMe]

Hi OM, I think I see what you are saying.. money coaxed away from banks will flow into assets and other high growth investments abroad.

While it cuts investment in the UK does that not still makes us more wealthy? If you invest say your pension abroad.. it returns 10% a year, but then you draw that pension in the UK and spend the gains here into the economy. There is a delay, but is the net result not that more wealth returns to the country in the long run?

It is a macro economic issue that to be honest I've not really considered in great depth.

I think it is a good point, but I'm not sure how it effects the housing market or whether that was your point or not. Banks are being recapitalised (as I understand it) because of the huge interest rate spread. My logic is that low rates mean wide margins without the risk of wide spread default. This results in debt being paid down and banks making profits. Profits mean banks can take bigger hits against their assets (yep, bank profits are a good thing for HPC in my opinion), which means TPTB can allow house prices to slip without endangering the banking sector..

The money washed into the markets by the low interest rates will eventually return home to be spent, thus no net loss (?)

Back to the real economy though, sterling, trade deficits and demographics. Saving the banks isnlt going to creagte the environment or adjustments required to reverse the disastrous route taken in focusing on finance and actively destroying investment and productivity gains produced by that investment.

As for the invesments abroad, many of their owners may decide to follow them elsewhere abroad. The standard of living is falling in tis country, even moving to a country where it is falling marginally lower would be increasingly attractive.

[Guest_ringledman_*]

Assume by the last crash here you're referring to recent 2008-2009 15% nominal drop rather than 1989-1995. For the former, in the event of double-dip repeat falls, hugely exacerbated by unemployment, I don't think the Govt can possibly repeat the support mechanisms (mortgage rescue), so nominal falls could easily be 20-30% over a couple of years. In 1989-95 unlike the OPs views of the past, nominal drops in some places were very high (I saw >50% NOMINAL fall on my flat in SE London) on top of high interest rates, taking real price drops to 70-80% in badly affected regions.

Contrary to popular opinion on this site, property doesn't usual crash that much in nominal terms. There will always be an argument for some places crashing a lot in the late 90s and likewise I bet you can find a lot of areas that nominal hardly moved down during the 90s crash.

The typical move in the early 90s crash was about 10% nominally over a 6 year period-

http://www.housingmarket.org.uk/house-prices/current-uk-house-prices-trend/08/

I would guess we are in for around 20% nominal fall from peak this time around (i.e. another 10% or so) with a total bottoming out phase of around 7-15 years. This is based upon the much larger property boom this time around (implying a much larger nominal crash but tempered by the much more lax 'negative rates' that the central bankers will now run).

The 2 key considerations are -

1) When do you get in? 4-5 years away at fair market value? or 10-15 years away at undervalued?

2) How can one protect one's wealth during the wait? Cash and bonds that will perform unfavourably to 'negative rates (and nearing the end of their secular bull run)? or equities and commodities that will perform more favourably to negative rates (and nearing the end of their secular bear market/ half way through their secular bull market respectively)?

Edited August 10, 2010 by ringledman

[roadtoruin]

Contrary to popular opinion on this site, property doesn't usual crash that much in nominal terms. There will always be an argument for some places crashing a lot in the late 90s and likewise I bet you can find a lot of areas that nominal hardly moved down during the 90s crash.

The typical move in the early 90s crash was about 10% nominally over a 6 year period-

http://www.housingmarket.org.uk/house-prices/current-uk-house-prices-trend/08/

I would guess we are in for around 20% nominal fall from peak this time around (i.e. another 10% or so) with a total bottoming out phase of around 7-15 years. This is based upon the much larger property boom this time around (implying a much larger nominal crash but tempered by the much more lax 'negative rates' that the central bankers will now run).

The 2 key considerations are -

1) When do you get in? 4-5 years away at fair market value? or 10-15 years away at undervalued?

2) How can one protect one's wealth during the wait? Cash and bonds that will perform unfavourably to 'negative rates (and nearing the end of their secular bull run)? or equities and commodities that will perform more favourably to negative rates (and nearing the end of their secular bear market/ half way through their secular bull market respectively)?

If the bottom was at 10-15 years from now (i.e. from 2020 if that's what you meant), then the timing would be very unlike recent boom-bust housing cycles. Fred Harrisons supposed 18 year cycle has worked out very well over the last 4-5 cycles, peak to trough never lasting more than around 7 years. So history would suggest a bottom around 2014 unless - as could well be - things really are different this time...

[Guest_ringledman_*]

If the bottom was at 10-15 years from now (i.e. from 2020 if that's what you meant), then the timing would be very unlike recent boom-bust housing cycles. Fred Harrisons supposed 18 year cycle has worked out very well over the last 4-5 cycles, peak to trough never lasting more than around 7 years. So history would suggest a bottom around 2014 unless - as could well be - things really are different this time...

Possible. But have we ever had such a boom from the bottom in 1995 to 2008?

If anyone can post the percentage increase in this bull market v previous bull markets I would be very interested.

Likewise, have the central bankers ever interfered in the cycle as much as now? (except for the Greenspan driven bull market that precceded this bust!).

All in all it paints a picture of a long drawn out affair similar to the German or Japanese bust albeit inflation driven rather than deflation driven.

Edited August 10, 2010 by ringledman

[keef319]

Excuse my ignorance, but...

If house prices crash in "real" terms but not "nominal" terms, is that a reason NOT to buy a house? (I'm talking about HOME not INVESTMENT).

Personally I'm looking for nominal falls so I don't need a rediculous multiple of my income for something that isn't a shoebox. If a house falls in real terms, but stays the same nominal value, it'd surely be better for me to buy it now whilst interest rates are low and I can get a good fixed rate.

I'm expecting nominal values to drop...