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Realistbear

F.t. : H P I Is A Delusion

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https://registration.ft.com/registration/ba...20abe49a01.html

Dangers of the housing market delusion

By Martin Wolf

Published: April 17 2006 03:00 | Last updated: April 17 2006 03:00

Do higher house prices make a country richer? The answer is simply
"
no
".
If the market value of the stock is raised, those who own it are made better off by as much as those who will buy their houses from them are made worse off. Higher prices merely redistribute income among residents, principally from the young to the old.
So why do fast-growing economies tend to have soaring house prices and slow-growing ones the opposite? The answer is not that higher house prices make a country richer, but the opposite: the wealthier the country, the more expensive its housing.

Gordon "Miracle Economy" Brown has sold us all down the river of debt in return for an illusion of wealth. :lol::lol::lol::lol::lol::lol::lol::lol::lol:

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Higher prices merely redistribute income among residents, principally from the young to the old.

Assuming cash purchases.

Higher house prices actually means money is redistributed from both the young and the old to the (interest charging) money lenders.

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Forgive my ignorance as I am relatively new here - have the papers had bearish articles like this dotted about over the past couple of years, or are they pretty recent?

Changing sentiment?

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It is possible the "respectable" newspapers do not want to be caught with their drawers down when it all goes pearshaped. They may be starting to warn that the economic cycle has chnaged direction and the days of easy money, HPI and unlimited MEW are coming to a close.

Forewarned is to be forearmed.

Edited by Realistbear

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Continued.......Why then should faster-growing economies experience strong rises in the price of housing?

Scarce land increases in value as economic activity rises. More important, richer people spend more on better located housing. Disproportionate increases in prices are needed to ration the slowly adjusting supply in response to higher demand. Planning restrictions may even halt the adjustment in supply.

Income is not the sole fundamental determinant of prices, however. Also important is the rise in the number of households. As people live longer, smaller households become more common and immigrants flood the labour market.

Improvements in supply of credit and reductions in nominal and real interest rates also raise demand: the former because they make it easier to borrow; the latter because they raise the prices of all real assets.

Declining economic instability can also justify more borrowing. The impact of lower real interest rates is ambiguous, however: in themselves, they raise asset prices, but to the extent that they suggest poor prospects for economic growth, they lower them.

Cyclical factors may also be at work. Real interest rates may prove unsustainably low: if so, a crash may follow soaring house prices.

A risk also exists of self-sustaining upward (and on the opposite side of the cycle, downward) spirals: higher house prices lead to more borrowing and spending, faster economic expansion, still higher house prices, and so forth. When prices fall, however, declining housing equity, shrinking borrowing and spending and widespread defaults may generate a contraction in economic activity and in house prices.

A big question therefore is whether house prices have overshot equilibrium levels. In its December 2005 Economic Outlook, the Organisation for Economic Co-operation and Development said prices were overvalued in Ireland, Spain and the UK, but not elsewhere. Yet British economists writing in the FT deny this of the latter (Gavin Cameron, John Muellbauer, Anthony Murphy, "Housing pessimists are wrong but have their uses", March 27, 2006). (http://hicks.nuff.ox.ac.uk/users/cameron/papers/ft0306.pdf)

Where prices have risen far faster than underlying incomes, only two possibilities exist.

Either prices have moved to a higher equilibrium level, in which case future purchasers will have to save more and consume less. That would itself have significant economic implications. Or they have reached an unsustainable level, in which case they will fall in real terms. That would have far more significant economic implications.

The future will tell us which and where - possibly quite soon.

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Continued.......Why then should faster-growing economies experience strong rises in the price of housing?

Scarce land increases in value as economic activity rises. More important, richer people spend more on better located housing. Disproportionate increases in prices are needed to ration the slowly adjusting supply in response to higher demand. Planning restrictions may even halt the adjustment in supply.

Income is not the sole fundamental determinant of prices, however. Also important is the rise in the number of households. As people live longer, smaller households become more common and immigrants flood the labour market.

Improvements in supply of credit and reductions in nominal and real interest rates also raise demand: the former because they make it easier to borrow; the latter because they raise the prices of all real assets.

Declining economic instability can also justify more borrowing. The impact of lower real interest rates is ambiguous, however: in themselves, they raise asset prices, but to the extent that they suggest poor prospects for economic growth, they lower them.

Cyclical factors may also be at work. Real interest rates may prove unsustainably low: if so, a crash may follow soaring house prices.

A risk also exists of self-sustaining upward (and on the opposite side of the cycle, downward) spirals: higher house prices lead to more borrowing and spending, faster economic expansion, still higher house prices, and so forth. When prices fall, however, declining housing equity, shrinking borrowing and spending and widespread defaults may generate a contraction in economic activity and in house prices.

A big question therefore is whether house prices have overshot equilibrium levels. In its December 2005 Economic Outlook, the Organisation for Economic Co-operation and Development said prices were overvalued in Ireland, Spain and the UK, but not elsewhere. Yet British economists writing in the FT deny this of the latter (Gavin Cameron, John Muellbauer, Anthony Murphy, "Housing pessimists are wrong but have their uses", March 27, 2006). (http://hicks.nuff.ox.ac.uk/users/cameron/papers/ft0306.pdf)

Where prices have risen far faster than underlying incomes, only two possibilities exist.

Either prices have moved to a higher equilibrium level, in which case future purchasers will have to save more and consume less. That would itself have significant economic implications. Or they have reached an unsustainable level, in which case they will fall in real terms. That would have far more significant economic implications.

The future will tell us which and where - possibly quite soon.

The equilibrium level will, in large measure, be set by IR. It will also be set by employment levels as both IR and employment determine affordability. IMO, the fundamentals underpinning HPI are deteriorating rapidly and a HPC of a significant magnitude is inevitable.

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the FT is a far more balanced paper than most. It's "relatively" high brow readers have a dislike for sensationalism and propaganda especially on economic issues. (maybe its the "financial" that hints its credentials might have a firm basis.) that is after all why they are reading the FT.

ditto the economist which recently had a article describing the biggest bubble in history.

other papers exhibit a range of Journalistic integrity and viewpoints which range for the intelligent and informed to hopeless shallowness.

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For a degree of balance here's the more 'bullish' FT article mentioned in todays tract ;

Housing Pessimists Wrong, But Have Their Uses

Gavin Cameron, John Muellbauer and Anthony Murphy

Financial Times, 27 March 2006

Bubble? What bubble? The last Economic Outlook from the Organisation for Economic Co-operation and Development argues that UK house prices are overvalued by 30%, or even more. It also warns of the danger of a protracted period of house price falls, with dire implications for consumer spending. The OECD is not alone. But these pessimists are wrong.

If there were a bubble, there would exist a systematic, albeit temporary, deviation of prices from fundamentals. Our research shows, instead, that fundamentals adequately explain the current level of house prices

Like many others, the OECD appears to base its conclusions on two pieces of unreliable evidence. One is the ratio of house prices to rents. The second is an equation estimated by the IMF in which housing supply, the changing age structure of the population, shifts in UK credit conditions and nominal interest rates play no role. It is hardly surprising that this equation turns out to be useless.

In our research, however, we do take these and other factors into account. We also model prices at the regional level. The great advantage of the latter is that it generates more precise estimates and more robust conclusions.

Our econometric model satisfactorily explains fluctuations in house prices from 1972 to 2003. It captures the effects of income, the size and age composition of the population, the housing stock, and interest rates. It also builds in the effect of recent house price growth, including transmission from leading regions to others, the so-called “ripple effect” from London house prices.

We distinguish between the short-run and long-run effects of house-building and population growth. We allow for the effects of stock markets and for differences between regions. We also examine the effect of today’s easier credit conditions. These not only have a direct effect on the level of real prices, but also change the relative importance of real and nominal interest rates: the former become more important and the latter less so.

If we estimate our model for data up to 1996 and then forecast the subsequent period, we generate predictions that are in line with the rapid price rises that happened. Our conclusion, therefore, is that we can readily explain the evolution of prices in this recent period by lower interest rates, higher real incomes per household, higher population growth (partly from immigration) and low rates of house-building.If we compare what actually happened with what our model says would have occurred, we can state that house prices would have been 25 percent lower in 2003 if real incomes per house had stagnated between 1998 and 2003. Had interest rates remained at 1998 levels, house prices would have been 7.5 per cent lower. But this understates the true role of interest rates, since it ignores their impact on incomes and the level of the stock market. For the 1988-99 period, however, now almost ancient history, we do find some symptoms of a policy-induced bubble.

We also examined house price developments for the period 2004-2010 on a range of assumptions about possible developments in income, population, house-building, inflation and interest rates. We find that only quite dismal scenarios – more dismal than any now contemplated by main-stream forecasters - would produce falls in nominal house prices and, even then, these would be small. London and the South are the regions where such scenarios would have the largest effects.

If we assume just a mild slowdown in the economy for a couple of years, which is more pessimistic than today’s consensus, house prices still rise in nominal terms in London and the country as whole. The figures for 2006 would be about a 3 per cent rise for London and 5 per cent overall. If we assume a gloomy scenario, instead, in which inflation rises, interest rates increase by 1.5 percentage points, real per capita income does not grow and the stock market stagnates before resuming growth in 2008, house prices in London and the South decline by about 1 per cent in 2006 and 2007. Needless to say, still gloomier, though less probable, scenarios can produce national house price declines. The risks may be low, but they are not zero.

Since cash from Real Estate Investment Trusts will be injected into the market in 2006 and the stock market has also been so strong, the deterioration in housing affordability is likely to continue. This would further confirm the largest redistribution of wealth from young to old in British history.The believers in the bubble were wrong. They are still wrong. But, paradoxically, their alarmism may have helped to prevent the bubble they fear from developing. It has not, or at least not yet.

Dr. Gavin Cameron is at Lady Margaret Hall, Oxford. Professor John Muellbauer and Dr. Anthony Murphy are at Nuffield College, Oxford. Full article at www.housingoutlook.co.uk

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For a degree of balance here's the more 'bullish' FT article mentioned in todays tract ;

Dr. Gavin Cameron is at Lady Margaret Hall, Oxford. Professor John Muellbauer and Dr. Anthony Murphy are at Nuffield College, Oxford. Full article at www.housingoutlook.co.uk

I sent an email to the author of this article asking for copies of their programs and data so that I could repeat their simulation. I didn't send this from a character "Billy Shears" on some website but from a proper verifiable academic address. I didn't receive any answer. This doesn't prove anything but I think to not reply at all is not good academic practice.

Billy Shears

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For a degree of balance here's the more 'bullish' FT article mentioned in todays tract ;

Housing Pessimists Wrong, But Have Their Uses

Gavin Cameron, John Muellbauer and Anthony Murphy

Financial Times, 27 March 2006

Bubble? What bubble? The last Economic Outlook from the Organisation for Economic Co-operation and Development argues that UK house prices are overvalued by 30%, or even more. It also warns of the danger of a protracted period of house price falls, with dire implications for consumer spending. The OECD is not alone. But these pessimists are wrong.

If there were a bubble, there would exist a systematic, albeit temporary, deviation of prices from fundamentals. Our research shows, instead, that fundamentals adequately explain the current level of house prices

Like many others, the OECD appears to base its conclusions on two pieces of unreliable evidence. One is the ratio of house prices to rents. The second is an equation estimated by the IMF in which housing supply, the changing age structure of the population, shifts in UK credit conditions and nominal interest rates play no role. It is hardly surprising that this equation turns out to be useless.

In our research, however, we do take these and other factors into account. We also model prices at the regional level. The great advantage of the latter is that it generates more precise estimates and more robust conclusions.

Our econometric model satisfactorily explains fluctuations in house prices from 1972 to 2003. It captures the effects of income, the size and age composition of the population, the housing stock, and interest rates. It also builds in the effect of recent house price growth, including transmission from leading regions to others, the so-called “ripple effect” from London house prices.

We distinguish between the short-run and long-run effects of house-building and population growth. We allow for the effects of stock markets and for differences between regions. We also examine the effect of today’s easier credit conditions. These not only have a direct effect on the level of real prices, but also change the relative importance of real and nominal interest rates: the former become more important and the latter less so.

If we estimate our model for data up to 1996 and then forecast the subsequent period, we generate predictions that are in line with the rapid price rises that happened. Our conclusion, therefore, is that we can readily explain the evolution of prices in this recent period by lower interest rates, higher real incomes per household, higher population growth (partly from immigration) and low rates of house-building.If we compare what actually happened with what our model says would have occurred, we can state that house prices would have been 25 percent lower in 2003 if real incomes per house had stagnated between 1998 and 2003. Had interest rates remained at 1998 levels, house prices would have been 7.5 per cent lower. But this understates the true role of interest rates, since it ignores their impact on incomes and the level of the stock market. For the 1988-99 period, however, now almost ancient history, we do find some symptoms of a policy-induced bubble.

We also examined house price developments for the period 2004-2010 on a range of assumptions about possible developments in income, population, house-building, inflation and interest rates. We find that only quite dismal scenarios – more dismal than any now contemplated by main-stream forecasters - would produce falls in nominal house prices and, even then, these would be small. London and the South are the regions where such scenarios would have the largest effects.

If we assume just a mild slowdown in the economy for a couple of years, which is more pessimistic than today’s consensus, house prices still rise in nominal terms in London and the country as whole. The figures for 2006 would be about a 3 per cent rise for London and 5 per cent overall. If we assume a gloomy scenario, instead, in which inflation rises, interest rates increase by 1.5 percentage points, real per capita income does not grow and the stock market stagnates before resuming growth in 2008, house prices in London and the South decline by about 1 per cent in 2006 and 2007. Needless to say, still gloomier, though less probable, scenarios can produce national house price declines. The risks may be low, but they are not zero.

Since cash from Real Estate Investment Trusts will be injected into the market in 2006 and the stock market has also been so strong, the deterioration in housing affordability is likely to continue. This would further confirm the largest redistribution of wealth from young to old in British history.The believers in the bubble were wrong. They are still wrong. But, paradoxically, their alarmism may have helped to prevent the bubble they fear from developing. It has not, or at least not yet.

Dr. Gavin Cameron is at Lady Margaret Hall, Oxford. Professor John Muellbauer and Dr. Anthony Murphy are at Nuffield College, Oxford. Full article at www.housingoutlook.co.uk

Unemployment and skint consumers dont come into it then ????

If there is one thing the general direction of this article has taught me, it is the true meaning of the term 'BULL SH!T' As there are too many probables and assumptions to take it seriously...

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Hi

It´s not true that all fast-growing economies have fast growing HPI. Argentina (where I am right now :P ) has the second fastest growing economy in the world after China. But HPI has been quite modest, and in fact very small when generalised inflation (around 10% per year) is taken into account.

There are three reasons for this:

1. There is no lack of space, so it is easier for supply to keep up with demand. There is a construction boom going on right now in fact.

2. Nominal interest rates are relatively high (9-10%), while wage inflation is lagging well behind general inflation, so banks are keeping credit fairly tight for now (real interest rates are negative though, but strangely this does not yet seem to have had the effect you might expect).

3. There are plenty of productive assets to invest your cash in like farmland, mines etc so housing is not mentally ingrained as the "only" investment

I am off to eat my weight in beef, chau

El_P

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yes that article is an example of a thin spherical film of academic pseudoscince, filled with hot air.

it is in the nicest possible way A "bubble".

prices do not need to deviate from fundamentals in order to form a bubble, speculators hopes may come to nothing without a deviation from fundamental pricing.

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Didn't these guys used to be more bearish?

A very heavyweight academic paper underlies this article and should be read at housingoutlook. I am not about to argue with them (I couldn't!) based on the data/assumptions they have looked I am sure that they are more right than wrong (heresy) but my concerns with all these models is what assumptions and inputs they have used - particularly on the projections they have for 2004/2010. eg cpi will not give a real measure of how far incomes are now being squeezed by increases in cost of services, council tax, energy/utliities, nor does it account for risk of external shocks, oils spikes, political risk, economic contagion etc. Also, does the model recognise the systemic weakening of the UK economy/labour market in productivity terms since 1997 and worldwide/globalisation effects (which I would say will have a lagging effect on long term HPI). I wonder if their model works for 2003-2005 too (a time of many regional HP rises).

My most cogent argument if I met them would be, if we are not overvalued in HP terms now then surely we should expect an increase/boom in HPs as the market will normally overshoot "fair value" rather than stop when it reaches it. Somehow, the UK housing market has done what no other asset market has done, it has magically recognised its fair value, stopped and there it shall sit...that I find hard to believe and that implicit conclusion in itself should sit uneasily with the authors.

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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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