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Smell the Fear

M4 And House Prices

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In life, I like to take a reductionist approach. I try to see things in the simplest possible light, stripping out all the fluff that clouds most issues. Taking this approach with the issue of HPI led me to think about what drives prices. I'm sure many of you will agree that the availability of credit (aka "money") is a major factor.

So, I decided to visit the BoE and ONS for a little data. Taking M4 money supply since 1987, and adjusting it for the increase in the RPI over that period gives the following figures:

Date M4 adj for RPI (millions) % change

31-Dec-87 295,206 -----------------------

31-Dec-88 324,781 ----------------------- 10

31-Dec-89 358,857 ----------------------- 10

31-Dec-90 367,312 ----------------------- 2

31-Dec-91 371,506 ----------------------- 1

31-Dec-92 372,042 ----------------------- 0

31-Dec-93 383,407 ----------------------- 3

31-Dec-94 388,464 ----------------------- 1

31-Dec-95 413,660 ----------------------- 6

31-Dec-96 442,219 ----------------------- 7

31-Dec-97 451,333 ----------------------- 2

31-Dec-98 476,493 ----------------------- 6

31-Dec-99 488,106 ----------------------- 2

31-Dec-00 513,864 ----------------------- 5

31-Dec-01 543,595 ----------------------- 6

31-Dec-02 565,127 ----------------------- 4

31-Dec-03 589,264 ----------------------- 4

31-Dec-04 620,963 ----------------------- 5

31-Dec-05 683,827 ----------------------- 10

A rapid growth in the M4 money supply can be seen in the late 80's, correlating neatly with the large price rises seen in houses at that time. Likewise, 1990 saw a precipitous drop in M4 and house prices. M4 then flatlined, whilst house prices plummeted throughout the early 1990s.

From 1995 onwards, an increase in the money supply occurred, and HPI rocketed.

Some observations:

+ it seems that a drop in the money supply is not needed to produce a drop in house prices. If M4 flatlines, house prices may drop. This is possibly because rapid growth in M4 is linked to speculative buying which drives the cost of houses up sharply. The drop back to a flatline in M4 is sufficient to blow off the froth and cause drops in house prices.

+ M4 can change rather quickly - from 10% in 1989 to 2% in 1990. I guess this is a "credit crunch" in action. When the word is out that prices are going down, the banks run for cover rather sharpish. A self-fulfilling prophecy?

+ 2005 M4 growth was 10%, an incredibly high figure, which doesn't seem to have been reflected in HPI for that year. Likewise, the figure for Jan-Apr 06 is 3%, which would be around 9-10% annualised. Yet prices do not seem to be rocketing so far this year. Is this possibly due to people borrowing more money to pay existing debts, or MEWing for items other than housing? If this is the case, it would appear that the lenders have seriously miscalculated the risks present in the market. If people are borrowing to pay existing debts, we can be sure that the game is almost up. It looks like we will be going out with a big bang this time.

Now, tear it apart! :lol:

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Remember that the central banks can create liquidity but they cannot control where it's channeled, credit growth in the City is running at an annualised 25%.

So part of the recent M4 data can be explained by harry hedge fund, not such a big factor in 1990.

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That is certainly an interesting table, are you aware of the other measures of Excess monetary growth? one which I have seen used is broad money deflated by GDP. your broad money deflated by RPI is a very simlar measure.

the thing that turns the economic cycle is the availability of credit/money, central banks will reign in money when supply seems to be growing out of proportion of the economy (as measured by prices/GDP etc) the bank has explicit prices targets and so will seek to use policy tools to prevent leakage from nominal broad money into narrow money and prices.

hence the boom in credit/M4 means policy must cause a bust before price inflation expectations are entrenched.

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Remember that the central banks can create liquidity but they cannot control where it's channeled, credit growth in the City is running at an annualised 25%.

So part of the recent M4 data can be explained by harry hedge fund, not such a big factor in 1990.

Thanks - that goes some way to explaining the paradoxical rise last year with fairly flat HPI.

Can you think of any reliable way to get an estimate of hedge funds' M4 contribution? I would be interested to see how the numbers look with that stripped out of the recent data.

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the thing that turns the economic cycle is the availability of credit/money, central banks will reign in money when supply seems to be growing out of proportion of the economy (as measured by prices/GDP etc) the bank has explicit prices targets and so will seek to use policy tools to prevent leakage from nominal broad money into narrow money and prices.

Though things are a little different from the old monetarist days, we now have price deflation in consumer goods produced in China, and wage inflation has been contained by outsourcing/migration/weak unions, this has contained remarkable amounts of easy credit. Commodities are of course reflecting this growth in the monetary base, this is now feeding into secondary effects and affecting inflation expectations, this is spooking the central banks, combined with the movement in gold.

Thanks - that goes some way to explaining the paradoxical rise last year with fairly flat HPI.

Can you think of any reliable way to get an estimate of hedge funds' M4 contribution? I would be interested to see how the numbers look with that stripped out of the recent data.

The City and brokerages took an additional £19.8b of credit in April (twice household lending), however we don't even know the number of hedge funds in existence let alone their exposure, needless to say it's considerable.

The real economy has simply merged into the "financial economy", it has certain potemkin characteristics.

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Though things are a little different from the old monetarist days, we now have price deflation in consumer goods produced in China, and wage inflation has been contained by outsourcing/migration/weak unions, this has contained remarkable amounts of easy credit. Commodities are of course reflecting this growth in the monetary base, this is now feeding into secondary effects and affecting inflation expectations, this is spooking the central banks, combined with the movement in gold.

The City and brokerages took an additional £19.8b of credit in April (twice household lending), however we don't even know the number of hedge funds in existence let alone their exposure, needless to say it's considerable.

The real economy has simply merged into the "financial economy", it has certain potemkin characteristics.

exactly we have had a nice period of 'good' inflation without 'bad' inflation, but the interesting thing is that with all of these 'investors' (read hedge funds) borrowing money to invest in (sand/gold/corn/Oranges/beans/oil/sugar)stuff its likely only some of them will be able to sell at a surplus before speculators quickly bid down the prices of these assets to take advantage of increasing 'roll yields' so when we see the prices of cocoa or copper implode, don't be surpried if someone somewhere is hurting, its a cutthroat world out there.

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so when we see the prices of cocoa or copper implode, don't be surpried if someone somewhere is hurting, its a cutthroat world out there.

It's happening right now on the IME, lots of hedge funds are hurting and there is even talk of intervention to help cover all those margin calls, a number of funds were short on gold on the run up from $600 to $720 :o If Man Group are hurting you can bet others are far worse off, the average fund is down 6% apparently, the worst since -9% levels seen in 1998 when LTCM collapsed.

Some funds were even betting on further declines of equity volatility into April 10_1_108.gif

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M4 and house prices are kind of hand-in-hand rather than one being caused by the other. Most money is "created" when a mortgage is taken on - the money is "borrowed into existance". So more mortgage lending = a growth in M4. So in a way, high house prices have caused M4 to grow, as opposed to the other way around. The real driver is the availability and affordability of debt. When its cheap and easy to borrow, people will get more debt, and M4 will go up.

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M4 and house prices are kind of hand-in-hand rather than one being caused by the other. Most money is "created" when a mortgage is taken on - the money is "borrowed into existance". So more mortgage lending = a growth in M4. So in a way, high house prices have caused M4 to grow, as opposed to the other way around. The real driver is the availability and affordability of debt. When its cheap and easy to borrow, people will get more debt, and M4 will go up.

Most money is not created as mortgages, but a proportion always is.

As mentionned already in this thread, at some times the financial markets (via big companies) are borrowing far more than joe public (for mortgages)... and the flavour of the moment seems to be borrowing to sink into hedge funds.

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when we see the prices of cocoa or copper implode, don't be surpried if someone somewhere is hurting, its a cutthroat world out there.

yeah, probably the producers (the farmers & miners, always unable to inure themselves against risk by passing it further down the chain) :(

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If say inflation runs at 2% and GDP is at 3% then the real growth in the economy surely ghas to be 1%? If at the same time, broad money increases by 10%, where does the wealth come from to create the additional 9% over real increase in GDP? This 9% is surely just printed money and should therefore weaken the value of sterling (other factors being equal).

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If say inflation runs at 2% and GDP is at 3% then the real growth in the economy surely ghas to be 1%? If at the same time, broad money increases by 10%, where does the wealth come from to create the additional 9% over real increase in GDP? This 9% is surely just printed money and should therefore weaken the value of sterling (other factors being equal).

The GDP numbers are after inflation anyway. I'm not sure if this is simply deducting CPI, or what...

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+ M4 can change rather quickly - from 10% in 1989 to 2% in 1990. I guess this is a "credit crunch" in action. When the word is out that prices are going down, the banks run for cover rather sharpish. A self-fulfilling prophecy?

I’ll just give you a simple example of a credit squeeze that happened today

My wife got declined for a car loan

I won’t bore you with the details, but I am sure that wouldn’t have happened a few weeks ago. We tried 3 lenders and they have all changed their lending criteria RADICALLY

Lucky for us the car was an impulse thing, no big deal and we can save up and pay cash for it in a short space of time (which is obviously the most sensible thing to do anyway)

The point is, other people out there which have been living on the housing ATM, MEWing, 0% interest etc, to fund their lifestyles may be in for a nasty shock in the near future if my experience is anything to go by

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The GDP numbers are after inflation anyway. I'm not sure if this is simply deducting CPI, or what...

RPI-X, IIRC.

Lucky for us the car was an impulse thing, no big deal and we can save up and pay cash for it in a short space of time (which is obviously the most sensible thing to do anyway)

I'd consider lease-hire, depending on the car it can be less than the depreciation costs from buying at retail.

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  • 331 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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