Extrapolating The Trend - Hp Graphs

[non-FTBer]

Look at the two graphs - nicked from In2Perspective

If you add a couple of lines to the charts and then extrapolate roughly what would happen if the pattern continued then it will probably make your morning.

IMHO there is never a new paradigm, but some factors are always different. The pattern looks obvious but does not neccessarily represent reality. I think that a line similar to those on these charts, along with higher and lower bands maybe 15% higher and lower than the line could depict the real outcome.

Last crash, the downtrend almost mirrors the uptrend. If it is the same pattern this time then it would point to falls being underway now ish (depending on region) and continuing till well after 2010. If we manage to get to the lower trendline then it would suggest an HPC (on average) of over 50% - can this be realistic?? (over £150K av down to less than £75K av).

The HP to earnings ratio is IMHO going to be subject to a few new factors: Rampant inflation not being matched by wage inflation. Will the HP to earnings ratio maintain the same pattern? Would that have an effect on the inflation adjusted HPs?

One thing I am sure of is that one of these charts will prove invalid as low wage inflation (possible wage deflation) will change the game.

Comments? (And yes I know its all supposition).

Edit: To add the graphs - Doh

Edited May 30, 2006 by non-FTBer

[CrashIsUnderWay]

but dont worry, by 2035 they will be back up to where they were last year. Maybe.

Or at least not much lower than 2010, population / economic decline permitting...

[bluenun]

Look at the two graphs - nicked from In2Perspective

If you add a couple of lines to the charts and then extrapolate roughly what would happen if the pattern continued then it will probably make your morning.

IMHO there is never a new paradigm, but some factors are always different. The pattern looks obvious but does not neccessarily represent reality. I think that a line similar to those on these charts, along with higher and lower bands maybe 15% higher and lower than the line could depict the real outcome.

Last crash, the downtrend almost mirrors the uptrend. If it is the same pattern this time then it would point to falls being underway now ish (depending on region) and continuing till well after 2010. If we manage to get to the lower trendline then it would suggest an HPC (on average) of over 50% - can this be realistic?? (over £150K av down to less than £75K av).

The HP to earnings ratio is IMHO going to be subject to a few new factors: Rampant inflation not being matched by wage inflation. Will the HP to earnings ratio maintain the same pattern? Would that have an effect on the inflation adjusted HPs?

One thing I am sure of is that one of these charts will prove invalid as low wage inflation (possible wage deflation) will change the game.

Comments? (And yes I know its all supposition).

Edit: To add the graphs - Doh

When and if house prices fall back to the "50k" line, any idea what that price will be in nominal terms, i.e. at todays GBP ?

[HousePriceLottery]

When and if house prices fall back to the "50k" line, any idea what that price will be in nominal terms, i.e. at todays GBP ?

50K! It's the old prices which are adjusted for inflation...

Edited May 30, 2006 by HousePriceLottery

[munimula]

One thing I am sure of is that one of these charts will prove invalid as low wage inflation (possible wage deflation) will change the game.

I think it's possible that we might not see the today's average house price reached again for 20-25 years due to the point you mention - wage deflation.

It is happening and it's worth remembering that it's only in the last 300 years that a difference in wages opened up between west and east. This is being reversed but until the wages of the east catch up the wages of the west can't go on on increasing as we are already massivly uncompetitive due to wages.

Who on current earnings + small increases is ever going to be able to afford the 4-5 bed detached houses which now seem to cost £450K + in any part of the country you care to look. Especially when you factor in so much money going on servicing the mortgage for the 1 and 2-bed flat you struggle to buy at 34 as your first property.

I just don't see what is going to sustain current prices for a long long time.

[Robbrent]

I just don't see what is going to sustain current prices for a long long time.

That's what made me a bear in the first place, I could see no reason for the increase save for easy money, in my part of the world the economy is in no better shape (in fact worse) than 4 years ago, people are not earning that much more yet prices have more than doubled, what gives,

[non-FTBer]

I think it's possible that we might not see the today's average house price reached again for 20-25 years due to the point you mention - wage deflation.

It is happening and it's worth remembering that it's only in the last 300 years that a difference in wages opened up between west and east. This is being reversed but until the wages of the east catch up the wages of the west can't go on on increasing as we are already massivly uncompetitive due to wages.

Who on current earnings + small increases is ever going to be able to afford the 4-5 bed detached houses which now seem to cost £450K + in any part of the country you care to look. Especially when you factor in so much money going on servicing the mortgage for the 1 and 2-bed flat you struggle to buy at 34 as your first property.

I just don't see what is going to sustain current prices for a long long time.

And we have a native population in decline (ever lower birth-rates).

Inward immigration only brings wages down as few of these are highly paid, and most are willing to work for less than the natives.

I think wage deflaiton is far more likely than wage inflation in the next 20 years.

Bearing in mind that wage inflation helped the last generations pay off their mortgages more easily, the reverse will likely be true in future.... wage deflation would make your mortgage progressively more difficult to pay.

And this is before you take into account the current scenario of low wage inflation, and high consumer price inflation (sod CPI, its not that low).... imagine wage deflation and costs of living squeezed.... messy.

[Charles_Darke]

And we have a native population in decline (ever lower birth-rates).

Inward immigration only brings wages down as few of these are highly paid, and most are willing to work for less than the natives.

I think wage deflaiton is far more likely than wage inflation in the next 20 years.

Bearing in mind that wage inflation helped the last generations pay off their mortgages more easily, the reverse will likely be true in future.... wage deflation would make your mortgage progressively more difficult to pay.

And this is before you take into account the current scenario of low wage inflation, and high consumer price inflation (sod CPI, its not that low).... imagine wage deflation and costs of living squeezed.... messy.

Anybody have a graph of (house price*base rates)/earnings graph?

[Robbrent]

Anybody have a graph of (house price*base rates)/earnings graph?

I would love to see what the bulls make of this,

[scheming]

Interesting the way the two lines diverge on the top graph and the peak at 2005 meets the top line, the trend of which could just be derived from the first two peaks. Could imply that the next peak, at maybe 2015/20 will be monumentally high with respect to the lower, underlying trend!

[werewolves]

Look at the two graphs - nicked from In2Perspective

If you add a couple of lines to the charts and then extrapolate roughly what would happen if the pattern continued then it will probably make your morning.

IMHO there is never a new paradigm, but some factors are always different. The pattern looks obvious but does not neccessarily represent reality. I think that a line similar to those on these charts, along with higher and lower bands maybe 15% higher and lower than the line could depict the real outcome.

Last crash, the downtrend almost mirrors the uptrend. If it is the same pattern this time then it would point to falls being underway now ish (depending on region) and continuing till well after 2010. If we manage to get to the lower trendline then it would suggest an HPC (on average) of over 50% - can this be realistic?? (over £150K av down to less than £75K av).

The HP to earnings ratio is IMHO going to be subject to a few new factors: Rampant inflation not being matched by wage inflation. Will the HP to earnings ratio maintain the same pattern? Would that have an effect on the inflation adjusted HPs?

One thing I am sure of is that one of these charts will prove invalid as low wage inflation (possible wage deflation) will change the game.

Comments? (And yes I know its all supposition).

Edit: To add the graphs - Doh

I live and die by this graph.

Good post. I just wish more people were aware of it.

We should form a secret society to spread the word. The Priory of House Price Crash.

[spline]

Anybody have a graph of (house price*base rates)/earnings graph?

This is the graph of P*R/E

1990 P = 69k, R = 15%, E = 16k, P*R/E = 64.7%

2006 P = 170k, R = 4.5%, E = 30k, P*R/E = 25.5%

based on the usual numbers - prices, HBOS; rates, BoE base; earnings AEI male full-time.

[Badger]

That little flat bit in 2001 was when I sold. Bugger.

[AvidFan]

50K! It's the old prices which are adjusted for inflation...

Surely not. I may be confused, but basically isn't this the anticipated "low point" on the non inflation adjusted curve, or the 50K line adjusted up by the underlying rate of inflation...

Ooohhh bugger - no you're right... the peaks and troughs are the correct values !!!

Wow. 50K houses here we come...

Edited May 30, 2006 by AvidFan

[uro_who]

Yep I regularly print out the graph for the unbelievers. I draw on the lines at peak and trough and then draw the extrapolation.

Gets the infidel every time!

[non-FTBer]

This is the graph of P*R/E

1990 P = 69k, R = 15%, E = 16k, P*R/E = 64.7%

2006 P = 170k, R = 4.5%, E = 30k, P*R/E = 25.5%

based on the usual numbers - prices, HBOS; rates, BoE base; earnings AEI male full-time.

Can't see too much relevance to that one.... care to explain?

Surely the most relevant thing is the (Average Mortgage Size [in the year] * Base Rate [average in the year])/Earnings, as this would show the affordability of mortgages taken out at that time (would not include houses bought 50 years ago which have massively risen in value)??

[spline]

Can't see too much relevance to that one.... care to explain?

Surely the most relevant thing is the (Average Mortgage Size [in the year] * Base Rate [average in the year])/Earnings, as this would show the affordability of mortgages taken out at that time (would not include houses bought 50 years ago which have massively risen in value)??

I think at least one poster wanted to compare the cost of servicing a loan (equal to the house price) as a fraction of gross income, and asked specifically for this graph - I already had it, so was no trouble to repost it.

But I think a better measure of affordability is the repayment to earnings ratio as it’s a proper reflection of the costs faced by typical buyers, although the graph above is obviously very relevant to interest-only borrowing. I think it shows that interest rate changes are very important, so that simply extrapolating the price to earnings ratio *without* accounting for interest rates is probably a poor way of estimating how prices are going to change over time.

Another commonly used measure is the "interest repayment as a percentage of income" column in the CML's tables ML1-4 - this is very similar to the graph but also includes MIRAS corrections and is based on the actual advances and earnings of those holding the mortgages.

Edited May 30, 2006 by spline

[Limpet]

This is the graph of P*R/E

1990 P = 69k, R = 15%, E = 16k, P*R/E = 64.7%

2006 P = 170k, R = 4.5%, E = 30k, P*R/E = 25.5%

based on the usual numbers - prices, HBOS; rates, BoE base; earnings AEI male full-time.

E=30k, my @rse

Limpet

[dunderhead]

I think wage deflaiton is far more likely than wage inflation in the next 20 years.

So do I.

I suspect someone in Government thinks the same.. how convenient it'll be to "re-establish the link between State pensions and average earnings" if average earnings are poised for a fall.

[spline]

E=30k, my @rse

Limpet

Well, let’s see:

HBOS says the typical house now costs £173k, so a P/E of about 5.7 gives E = 173/5.7 = £30k.

ASHE say median male full-time earnings are 25k, they also say that the mean is about 24% above the median, so again that’s 25*1.24 = £31k.

Edited May 30, 2006 by spline