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A.steve

Graph Relating Hpi And Money Supply (M4?)

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I remember seeing, years ago, credible articles and graphs showing correlation between some monetary metric and house prices (indices?)

Does anyone have links, or can someone else remember a google-able phrase?

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@long time lurking: strange that your house-price graph doesn't match with the one on the frontpage, ie the one below.

homepage.png

The amounts don't match. Any clue why they are different?

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During the boom you definitely saw a link, it was after all rightly labelled a credit boom, and the credit was allocated to purchasing residential dwellings.

Since 2008, not so much.

LPMBZ2A.png

Whatever is behind the London led tick up since Q1 2013, it wasn't a huge escalation in the volume of oustanding loans.

For context, look at this from another thread:

Log%2BLMPBZ2A.png

From the same post:

If broad money expansion had stayed on trend LPMBZ2A would be £2.8 trillion today. In fact it is barely half that and as you can see, little changed against where it stood pre-bust, at £1.5 trillion, (expressed in GBP millions it is £1,466,388, the log to the base 10 of which is 6.16).

Something fundamentally changed in 2008. Between eager BTLers and desperate wannabe owner-occupiers bank-rolled by permanent-emergency interest rates and comedy schemes from Osborne's Treasury, we have a sufficiency of market-making buyers to put a little flesh on the illusion that we are "back to normal", but something is different and it will feed through into prices eventually. I'm still staying out of the market for a while yet.

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@long time lurking: strange that your house-price graph doesn't match with the one on the frontpage, ie the one below.

homepage.png

The amounts don't match. Any clue why they are different?

At a guess i would say they are using data fro different sources maybe land registry/halifax indice nationwide is the source for the data in the graph i posted

Edit : there both from the nationwide so have not got a clue

Edited by long time lurking

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At a guess i would say they are using data fro different sources maybe land registry/halifax indice nationwide is the source for the data in the graph i posted

Both graphs explicitly state that they use nationwide as the source, so that's not it.

I must be the word "nominal prices" vs "real prices" on the y-axis, whatever they mean by it in this context.

Edited by moesasji

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At a guess i would say they are using data fro different sources maybe land registry/halifax indice nationwide is the source for the data in the graph i posted

@long time lurking: strange that your house-price graph doesn't match with the one on the frontpage, ie the one below.

The amounts don't match. Any clue why they are different?

The pair of you are a disgrace. One is real and one is nominal. If you want a know-it-all @rse to explain the difference I know someone who might be prepared to help.

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The pair of you are a disgrace. One is real and one is nominal. If you want a know-it-all @rse to explain the difference I know someone who might be prepared to help.

Just noticed :huh: that inflation gets every where

Edited by long time lurking

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Both graphs explicitly state that they use nationwide as the source, so that's not it.

I must be the word "nominal prices" vs "real prices" on the y-axis, whatever they mean by it in this context.

OK - our posts crossed.

Money today is worth more than money tomorrow. One simple reason is inflation. If what I want is a piano, if piano prices are inflating at 10% per annum, a £1000 piano today will cost me £1100 in a year's time. One way to wash this effect out of comparing past prices with current prices is to inflate past prices up to today. So when I look backwards I might see that piano prices did the following, in terms of the price tag on the piano on the day, so called nominal prices:

2012 £1000

2013 £1050

2014 £1100

2015 £1150

If I assume that I should inflate these prices up to date at Consumer Price Inflation (CPI), which for simplicity I assume has been of a constant 5%, I get the following for the 2012 price

£1000 * 1.05 = £1050 (takes it to 2013)

£1050 * 1.05 = £1103 (takes it to 2014)

£1103 * 1.05 = £1158 (takes it to 2015)

Under this way of looking at things I judge that pianos are actually marginally cheaper today (£1150) than they were in 2013 (£1158)

I can do it for the whole set of nominal prices, producing a set of real prices, where the effect of inflation has been washed out of the comparison.

Each real price is just the nominal price 'inflated forward' at the prevailing inflation rate over the years that have passed since the time when the piano sat in the shop with that nominal price.

2012 £1158 (£1000 * 1.05^3)

2013 £1158 (£1050 * 1.05^2)

2014 £1155 (£1100 * 1.05)

2015 £1150

This is why the peak in the graph of the real series exceeds the peak in the nominal series. Basically in this example pianos are not getting more expensive in nominal terms quite as fast as everything else. If my wages were also inflating at a comparable rate to stuff (as measured by CPI) then I'd think that pianos were gradually getting cheaper. The fact that wages haven't been keeping up with CPI casts a bit of a shadow over the usefulness of real prices inflated at CPI.

Real prices are sometimes called constant prices and nominal prices are sometimes called current prices.

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Just noticed :huh:

Don't worry about it - I'm no great shakes with these math-things either, but can hold my own corner against claims low-IQers are the majority in paying ever higher house prices. Prices others refuse to pay, and continue to rent.

Recall reading the last UK piano-manufacturer closed down a few years ago. My Gran was a piano-teacher; she had students each evening, and the extra income helped pay their mortgage a long time ago. Add it to the import list, or buy cheaper electronic kit to combat the so called inflation.

2009

Once a thriving part of the British economy with 300 separate manufacturers, the UK’s piano making industry is soon to draw to a close. In October Kemble and Co., Britain’s single remaining piano manufacturer, will shut down. The main shareholder, Yamaha, who bought 90 per cent of the company during the recession in 1986 thereby extending its life by 23 years, has finally decided that its support of Kemble is no longer financially viable.

http://www.classical-music.com/news/britains-last-piano-manufacturer-close

http://news.bbc.co.uk/1/hi/england/beds/bucks/herts/8333215.stm

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This is why the peak in the graph of the real series exceeds the peak in the nominal series. Basically in this example pianos are not getting more expensive in nominal terms quite as fast as everything else. If my wages were also inflating at a comparable rate to stuff (as measured by CPI) then I'd think that pianos were gradually getting cheaper. The fact that wages haven't been keeping up with CPI casts a bit of a shadow over the usefulness of real prices inflated at CPI.

Real prices are sometimes called constant prices and nominal prices are sometimes called current prices.

We are indeed a disgrace, but I'm sure I'm not the only one struggling with this. Anyway thanks for the extensive explanation!

One minor question remains. If I understand you correctly the graph on the frontpage is adjusted for inflation by adjusting prices in the past to compensate for inflation. Is the trend-line of 2.9% annual increase hence above the inflation-number they use to calculate these graphs?

Edited by moesasji

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We are indeed a disgrace, but I'm sure I'm not the only one struggling with this. Anyway thanks for the extensive explanation!

One minor question remains. If I understand you correctly the graph on the frontpage is adjusted for inflation by adjusting prices in the past to compensate for inflation. Is the trend-line of 2.9% annual increase hence above the inflation-number they use to calculate these graphs?

The trendline is to be taken with a very substantial pinch of salt. On the one hand, there obviously has been a tendency of house prices to inflate even in real terms, however the sheer bananas boom-bust phases means sticking an trendline on at such wild data is a bit of a reach.

However, long and short of it, it does reflect the fact that houses have been getting pricier faster than other stuff. If that was not the case there would be no trend in the inflation adjusted house prices - they'd just be flat.

Worth noting that they won't use a single inflation number to produce the graph, but use an appropriate data series, i.e. inflate forward through 2003 at the 2003 CPI rate, inflate through 2004 at the 2004 CPI rate and so on. I don't know which series they use, there are a number (CPI, CPIH, RPI, RPIx), I'm just suggesting CPI for the sake of argument. Hope that helps.

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During the boom you definitely saw a link, it was after all rightly labelled a credit boom, and the credit was allocated to purchasing residential dwellings.

Since 2008, not so much.

LPMBZ2A.png

Whatever is behind the London led tick up since Q1 2013, it wasn't a huge escalation in the volume of oustanding loans.

For context, look at this from another thread:

Log%2BLMPBZ2A.png

From the same post:

Sure, but the housing market is a set of regional markets. Generally the market is flat compared to 2007/8. Higher in London. Lower in the midlands north. There may well be an escalation in loans to London buyers offset by lower fowards to those up North.

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I'm just suggesting CPI for the sake of argument. Hope that helps.

That explanation indeed helps a lot as it now makes sense to me why one needs to compare M4 money supply with the nominal graph.

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Sure, but the housing market is a set of regional markets. Generally the market is flat compared to 2007/8. Higher in London. Lower in the midlands north. There may well be an escalation in loans to London buyers offset by lower fowards to those up North.

It's the total stock of lending, so there's a whole great mess of things in there, including diminution of the principals on boom lending as it gets paid down, especially as stuff written in the early boom as interest-only gets switched to repayment, and also as a whole slew of borrowers benefit from low rates and use the head room to pay down the principal. Essentially if a small number of people leveraged up today, they'd give you rising as prices as this small volume of transactions set current prices. In the meanwhile past buyers might be deleveraging.The two effects net off and the total loan stock stays flat.

My point in posting was to suggest that there wasn't really a straight forward link between the amount of broad money and house prices, except that perhaps in a period of massive expansion in credit, in a country where credit was extended principally against houses, when you might expect them to go up in tandem. The point of the graphs is to show that post-2008 stagnant secured lending was found in periods of stagnant/gently falling prices prior to Q1 2013 and rising prices post Q1 2013.

Also super relevant that a lot of the expansion in secured lending pre-2008 was MEW, and not loans for purchase linked to transactions that worked into the Land Registry data.

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During the boom you definitely saw a link, it was after all rightly labelled a credit boom, and the credit was allocated to purchasing residential dwellings.

Since 2008, not so much.

Thanks to everyone for the graphs, though they aren't the ones I (vaguely) remember. Still interesting.

A few ideas spring to mind:

  • An error, well known to statisticians, when correlating time series, is that trends (if not removed) give seemingly high correlation - but without this implying much beyond the two time series following broadly the same trend. I had hoped to check that such an issue had not given a false impression that M4 and house prices were closely related. Obviously, I'm now also interested in data after 2008... and to see if that tells a consistent story.
  • I think there may be problems identifying what we mean by 'money supply' - statistically speaking. My recollection was about M4 - but that metric, itself changed at the end of 2007 in what looks to be an HPI-relevant way. My recollection was that M4 itself had been introduced because Thatcher's government, in the 80s, set a monetary policy to target M3 - which, naturally, resulted in new loans being constructed to fall outside M3 - requiring, in turn, that the BoE form a new metric to capture the new instruments. I think my point is that it seems very difficult to get any consistent measurements of money supply over more than a decade or so.
  • Are there any robust statistics for bank loans secured, directly or indirectly, against real-estate? Preferably where the definition of the measure hasn't changed.

I'd welcome any insights...

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...

  • Are there any robust statistics for bank loans secured, directly or indirectly, against real-estate? Preferably where the definition of the measure hasn't changed.

...

Are you aware of the MLAR stats? Here. Pretty sure that MLAR are residential only, not all real estate.

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...

  • I think there may be problems identifying what we mean by 'money supply' - statistically speaking. My recollection was about M4 - but that metric, itself changed at the end of 2007 in what looks to be an HPI-relevant way. My recollection was that M4 itself had been introduced because Thatcher's government, in the 80s, set a monetary policy to target M3 - which, naturally, resulted in new loans being constructed to fall outside M3 - requiring, in turn, that the BoE form a new metric to capture the new instruments. I think my point is that it seems very difficult to get any consistent measurements of money supply over more than a decade or so

...

Goodhart's law in action.

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