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Guest Guy_Montag

House Price Cycle

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Guest Guy_Montag

I was reading another thread, in which someone suggested house prices were 25% overpriced. I know we can all debate the exact level of excess, & it will, of course, vary not just round the country, but from street to street.

My question is: If prices are currently 25% overpriced can we FTBers look forward to houses being 25% undervalued before they pick up again.

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I was reading another thread, in which someone suggested house prices were 25% overpriced. I know we can all debate the exact level of excess, & it will, of course, vary not just round the country, but from street to street.

My question is: If prices are currently 25% overpriced can we FTBers look forward to houses being 25% undervalued before they pick up again.

Possibly, when things fall in price they often overshoot in a correction.

But it is a bit of a simplistic view.

Inflation will play a big part. What will real vs nominal falls be??

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I was reading another thread, in which someone suggested house prices were 25% overpriced. I know we can all debate the exact level of excess, & it will, of course, vary not just round the country, but from street to street.

My question is: If prices are currently 25% overpriced can we FTBers look forward to houses being 25% undervalued before they pick up again.

Like you say, I think this will really depend on overall area, street and even house. I think it's right to say that in previous downturns there has been some undervaluing before the pick up begins. But it would be impossible to apply that theory across the board. Even in this market there are some properties that are comparatively undervalued. In short - it's a bit of a mess out there!

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Possibly, when things fall in price they often overshoot in a correction.

I agree. Things usually move from 'overbought' to 'oversold'. It's rare that something corrects to its exact value. It's like a pendulum swinging bwetween two extremes about the optimal location. When the current supply of stupid and/or rich people runs out, prices will have to fall to a level at which sensible and/or poor people are prepeared to/can afford to start buying. Historically the average house price has always reverted to three times the average salary before setting off up again. That would require a 50% fall right now though it's more likely that the average house price will fall to three times the average salary by falling less than 50% with wages rising a bit to make up the difference.

Edited by Bingley Bloke

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Think the long term trend is now (going up slightly it seems) 3.75x wage so trend line for average is 3.75x average house price, but the average house price is over 6x! and there seems to always be a over correction, last time went down to just over 3x. The size of the boom seems proportional to the subsequent over correction (ie the bigger the boom the bigger the over correction) which because of the magnitude of this boom would take us below 3x average salary? Nominal and real price must be asertained and I think an inflation rate of nearly 8% should be used (real rate)

So nominal fall by 2011 (my personal view of start of long trough) 5 years would bring actual % down (eroded away with inflation) Saying that I still think it possible to see actual falls well in excess of 25% of peak prices

You can plot a chart based on the one on the home page, adding particular senarios.

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I agree. Things usually move from 'overbought' to 'oversold'. It's rare that something corrects to its exact value. It's like a pendulum swinging bwetween two extremes about the optimal location. When the current supply of stupid and/or rich people runs out, prices will have to fall to a level at which sensible and/or poor people are prepeared to/can afford to start buying. Historically the average house price has always reverted to three times the average salary before setting off up again. That would require a 50% fall right now though it's more likely that the average house price will fall to three times the average salary by falling less than 50% with wages rising a bit to make up the difference.

That makes a lot of sense. :)

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I was reading another thread, in which someone suggested house prices were 25% overpriced. I know we can all debate the exact level of excess, & it will, of course, vary not just round the country, but from street to street.

My question is: If prices are currently 25% overpriced can we FTBers look forward to houses being 25% undervalued before they pick up again.

I have a vague, badly-thought-through theory that overshoot is more likely if there are significant nominal falls (as in 1989 onwards) rather than nominal stagnation/real falls as in the seventies. People didn't really perceive the 70s real falls as "falls", just as a sluggish market that eventually picked up again. But when there are nominal falls, I think momentum builds up as people panic and lose faith in property - that was probably why we overshot in the early 90s (together with Black Wednesday killing off any lingering chance of a quick turnaround).

Personally I think we could have either nominal or real falls this time, so it may depend on which materialise. But I could be talking rubbish...

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Guest Guy_Montag

I am wary of using 8% as the level of inflation, after all wage inflation is pretty low (3-4%), and that is the inflation that will eat away your mortgage & the cost of houses. If the cost of living (CPI) is at 8%, but wage inflation is at 4% that makes houses less affordable, not more affordable.

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My question is: If prices are currently 25% overpriced can we FTBers look forward to houses being 25% undervalued before they pick up again.

There seem to be two ways of looking at this – one is to say that prices oscillate about some equilibrium point so that the ups are balanced by the downs, but noting that the oscillations are usually very asymmetric with the ups being more peaky and larger than the flatter downs, and the other is to suppose there is some baseline onto which (purely|mostly positive) bursts or pulses develop.

The baseline idea fits the affordability data quite well, but the price-to-earnings ratio, I think, can be made to fit either, so although I favour the baseline approach there is clearly a bit over over/under correction when the equilibrium point shifts and a visible up/down price history (and future expectation) develops. But it really boils down to how you determine the equilibrium – a trend line analysis will by definition have oscillations of both signs, whereas a pricing model based on fundamentals is more likely to fit the troughs – the peaks are then attributable to speculative demand driven by the price history and future expectations. But clearly when noticeable nominal falls happen (and sentiment expects them to continue) then prices can be driven below the baseline.

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Think the long term trend is now (going up slightly it seems) 3.75x wage so trend line for average is 3.75x average house price, but the average house price is over 6x! and there seems to always be a over correction, last time went down to just over 3x.

The average price may have gone down to 3x the average wage, but this didn't happen eveywhere in the country. For example, the cost of a 3 bed semi (average?) in my area got down to about £115k (now about £300k) at the bottom of the last crash.

Even assuming an average local salary of £25k, which I doubt at that time, this would require almost 5x salary.

This is based on the cheapest part of the area, as well. In the decent part of town a 3 bed semi would have been £150k+ (now £400k+)

3x salary would have bought a 2 bed flat or a small 2 bed house at best in this area at the bottom of the last cycle. Ok, this is in London, but not a particularly expensive part.

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I am wary of using 8% as the level of inflation, after all wage inflation is pretty low (3-4%), and that is the inflation that will eat away your mortgage & the cost of houses. If the cost of living (CPI) is at 8%, but wage inflation is at 4% that makes houses less affordable, not more affordable.

It's inflation of disposable income that really matters (after all taxes and essential living costs have been removed). That's the maximum money available to service a mortgage.

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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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