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Bubble Pop Electric

Prediction

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I tried to do a bit of maths (gulp!) to come up with a prediction of when the bubble might pop. My idea was that you would need to identify a turning point, when the current rate of greater than exponential growth is reversed, so......

I plotted a graph with the real house prices over the last 20 or so years, then also plotted an exponential curve corresponding to the growth between 2 successive years - so a curve showing what the house price value would be if it had continued to grow at the same rate between 95to96, 96to97, 97to98, etc.

Interestingly the real house price has been outperforming the exponential for a good number of years, but recently it slowed down to the point where it has been underperforming exponential growth. However, the REALLY interesting thing, is that the exponential value from 1998 is just about to catch up & overtake the current average house prices! (At more or less exactly the beginning of the 3rd quarter of this year).

That is, real house prices were far and away outperforming the expected achieved price had they have followed the exponential from 1998, but are now achieving a lower value than that exponential.

What does this mean, if anything? I haven't got a clue, except that it shows a significant change in performance to previous years, and the fact that the graph of real house prices is now flat, would suggest that we are at the edge of the precipice (I'm comparing the shape of the graph against the shape of other known bubbles, such as mississippi, south sea, tech stocks, the 1920's, etc - they all flatten off & then plummett).

I'm not suggesting a huge & immediate fall, rather that the current underperformance (compared to previous years), will lead to more significant corrections per quarter that are patently obvious to everyone. Obviously once this occurs, confidence is lost & the real corrections begin.

Further to this, I also tried plotting exponential decline of the market from where it starts to underperform the 98 exponential, which seemed to predict roughly a 25 - 30% drop in the average price by the end of Q1 07.

I hasten to add that I'm not a mathematician, & all of the above is probably complete & utter tosh.

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Take a copy of the graph, paste it into "Paint", save it as a bitmap and upload.

Would be good to view.

Bear in mind as well that house prices outperform consumer inflation over long periods of time.

What they don't do is outperform wage inflation.

For example, CPI is around 2% at the moment, wage inflation is about 4% (ie every year our material living standards increase, the fundamental purpose of economic growth)

So house prices will generally increase about 2% above CPI.

That's the basic gist.

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ehhhh! could you say that again?  :unsure:

Right, I'll try.

Exponentials are used to predict natural growth. You can use them for predicting the growth of just about anything. For example, if you had 500 rabbits & you know that x number of new rabbits appeared this year, you could use an exponential to predict the rabbit population in y years time. It takes a given rate of growth & calculates the future final figure, taking into account all of the new rabbits & their input to the population growth.

Markets normally don't grow exponentially, bubbles grow faster than exponentially.

So, taking the amount of growth in the housing market between 1996 & 1997 for example, you could calculate what the house price should be at any given time in the future, if that rate of growth is sustained.

By plotting, for every year since the mid 90's, the expected rate of growth from that years performance of the housing market, it becomes clear that the housing market far exceeded its predicted level, that is, the average house price was far higher than it should have been, so the market has performed at better than exponential rate.

However, the HM is now performing less than exponentially, and the house price right now is in line with where it should be had the market grown at the 1998 exponential rate. This is the first time since 1998 that the average house price is where it should have been at 1998's growth rate. It is now far underperforming 1997's exponential growth rate.

In other words, although the current slow down/ drop of 0.2% per month doesn't look like much, in reality, and in comparison to how the market has been growing, it is phenomenally under performing previous growth. At current performance, the 1998 exponential curve will overtake the current house price at around the beginning of the 4th quarter this year. At that point, the average house price will be lower than should anticipated - the first time that has happened in 7 years.

Of course, the fact that the amount of growth seen in 1997 & 1998 was already much higher than it should have been, suggests that the bubble has reached it's maximum size, which usually means that we are rolling over the top & into the downslide, and further mathematical endeavours into predicting the declining market suggest that the average house price will have dropped by roughly 25% by Q1 07.

But..... as I said I'm not a mathematician & this could all be mathematical Barllocks.

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Take a copy of the graph, paste it into "Paint", save it as a bitmap and upload. [bandWagon]

Save it as a GIF or PNG either of which are web standards. Bitmap (BMP) is a Windows specific format which is not appropriate for use on the Web (it's also uncompressed which wastes people's time and bandwidth).

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Take a copy of the graph, paste it into "Paint", save it as a bitmap and upload.

Would be good to view.

Bear in mind as well that house prices outperform consumer inflation over long periods of time.

What they don't do is outperform wage inflation.

For example, CPI is around 2% at the moment, wage inflation is about 4% (ie every year our material living standards increase, the fundamental purpose of economic growth)

So house prices will generally increase about 2% above CPI.

That's the basic gist.

I'll try. I did it all on paper at first, then started copying it onto a spreadsheet. If I can get it to calculate the exponentials & plot the graph properly, I'll stick the whole spreadsheet up - but it might take me a wee while.

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Markets normally don't grow exponentially, bubbles grow faster than exponentially.

I will disagree with you on this point.

As you pointed out, populations grow exponentially.

With them the demand for goods and services increases exponentially.

Give us a graph, a picture tells a thousand words...

Edit: Yep, rather use JPG or another compressed format. Paint didn't previously support these formats, suppose this is an XP upgrade?

Edit2: Yep, rather use gif or png for graphs, less space. And don't take my advice on file formats.

Edited by BandWagon

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Edit: Yep, rather use JPG or another compressed format. Paint didn't previously support these formats, suppose this is an XP upgrade? [bandWagon]

Graphic formats can easily be converted with IrfanView (Windows, freeware):

http://www.irfanview.com/

JPG is best for images containing graduated colours such as photos. GIF or PNG are best for flat images such as graphs (smaller file size, less processing).

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Edit: Yep, rather use JPG or another compressed format. Paint didn't previously support these formats, suppose this is an XP upgrade? [bandWagon]

Graphic formats can easily be converted with IrfanView (Windows, freeware):

http://www.irfanview.com/

JPG is best for images containing graduated colours such as photos. GIF or PNG are best for flat images such as graphs (smaller file size, less processing).

Ready. How do I save a chart from excel as a GIF?

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Press the printscreen button on your keyboard when you are looking at the graph. Go into microsoft paint and press ctrl+v or go to paste under edit. Then go to file and save as and there is a list of file types when you go to save.

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Okay.

Before I start, I have to point out that this data is not the same data that I used originally. On the original graph I had the average house price now as being around £185K. However, I can't find those exact numbers, and I also don't fancy sittting here typing numbers into a spreadsheet all night either. So I'm using a different set of figures which show the average house price now as 155K.

Obviously the graphs aren't going to be identical, but they do still show the dramatic change in performance. I've split the graphs down by year, otherwise it's too messy with all of the different plots.

Incidentally, the long term prediction based against growth of more normal years would place the average house price at somewhere aroung £115K - £120K today.

Here goes.

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The important thing to consider is the amount of divergence - ie, take a point in time & measure the difference in £'s betwen the actual price & the exponential. Then move forwards or backwards in time & measure again to see how the market is changing.

1997, 1998, 1999, & 2000

97.gif

98.gif

99.gif

2000.gif

post-2729-1126387811_thumb.jpg

post-2729-1126387824_thumb.jpg

post-2729-1126387831_thumb.jpg

post-2729-1126387839_thumb.jpg

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I kinda see wher you are coming from bubble.

true,real house price growth including factoring in demographic changes and immigration SHOULD be about 5% p.a(with wage inflation of 3.8% ish)

...just goes to show you how far out of kilter this boom is,and also that it was influenced by other factors....rather than the VI immigration spin that has been spouted,THAT HAS BEEN GOING ON FOR YEARS.

we are now at levels which are just insane....if you were to draw a line through a long-term graph for housing...I'm talking 50 year avg,you'll see that the correct long term avg price for a prop is about the same as was registered average in 2001.......so typical house more like 100k than 160k.(that's about 40% overvalued)

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I kinda see wher you are coming from bubble.

true,real house price growth including factoring in demographic changes and immigration SHOULD be about 5% p.a(with wage inflation of 3.8% ish)

...just goes to show you how far out of kilter this boom is,and also that it was influenced by other factors....rather than the VI immigration spin that has been spouted,THAT HAS BEEN GOING ON FOR YEARS.

we are now at levels which are just insane....if you were to draw a line through a long-term graph for housing...I'm talking 50 year avg,you'll see that the correct long term avg price for a prop is about the same as was registered average in 2001.......so typical house more like 100k than 160k.(that's about 40% overvalued)

The average should now be about £115K based on the long term trend, calculated from the exponential at normal growth rates.

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Have you tried plotting on a vertical log scale? Then any exponential bits become straight lines and ‘above exponential’ growth is upward curvature. But, there are also some arguments as to why UK *average* prices might show some of this, but down to the process of averaging the ripple - it steepens and the weighting increases with distance from London. You might see this most clearly when ‘The North’ is going through its short-lived 30-40% pa rise stage.

Edited by spline

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  • 301 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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