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Economic Model Predicts Falling House Prices In Uk


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And, um, what makes you think we're going to have a 'baby boom' when people have to choose between paying a mortgage at bubble prices or having kids? What exactly is going to turn around the demographic collapse of productive people in the West? Hint: chavettes pumping out new generations of dole-scum make things worse, not better.

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Before anybody gets too excited about this, I think it's worth pointing out that it's very easy to make a model fit current trends but much harder to get it to predict the future. Even Excel does a reasonable job of modelling past trends in house prices but does a more questionable job of predicting the future.

To show what I mean, attached is a screen dump from a spreadsheet of the house price data from the HPC front page. The black line is a trend line created in Excel based on a power series fit of the data. It manages to fit current data OK, but I think that even the most bearish of the posters here would agree that house prices becoming less than zero in a few years' time is slightly unrealistic.

Excel_HPC_Forcast.JPG

Quite. If his model is correct, one must also be able to predict interest rate changes; if he could do that, he could make himself even richer and much more easily.

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Exactly.

(And out of interest, houses attract a tax. As the owner is liable for the tax, no matter how high, and no matter how few jobs there are in the area the house is located to fund rents, it is quite possible for a house to have a negative value - ie. you would have to pay someone to take on the ongoing tax liability.

I believe this has happened elsewhere in the world in destitute areas in the past. But no, I'm not predicting that.)

it happened in the uk too.

In the 90s you could pick up entire terraces of empty houses in places like the 'pool and sunderland for £1.

As long as you promised to take on the responsibility for doing them up / maintaining them.

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Guest wrongmove

This prediction must take into account ecomonic conditions (very hard to predict) as well as demographics (bit easier to predict in terms of birth rates, but still tricky when immigration/emmigration are taken into account)

How else did prices slump in 1990 ? Was there a cull or something ?

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The two most significant causes of HPI are increases in population and increases in real income. Im sure he assumed income growth would continue as it had in previous decades and factored in the odd recession here and there. If the demographics go against the market it doesnt matter what the economy is doing really, there will be oversupply of property , UNLESS you import loads of people who are at or close to the age when people usually start to form households - cue mass immigration. But the germans etc have the same problem and their demographics are even worse i think, their economy will start shrinking in years to come from less workers etc so they may mass import the immigrants then and UK PLC will be left without the young people to continue growing the economy.

Edited by ronnie
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It's a demographic model rather than an economic one.

For the first of several threads discussing this paper see 'Federal Reserve: The Baby Boom: Predictability In House Prices And Interest Rates.' [January 2006]:

http://www.housepricecrash.co.uk/forum/ind...showtopic=21315

It is only wrong about Ireland - as prices there will decline soon (but author of thus work underlined, that some factors are simplifed in his model). [Assurbanipal]

Indeed, the model makes no allowance for changes in the housing stock -- a major factor in Ireland...

'Ireland has highest European per capita house building rate':

http://www.finfacts.com/irelandbusinessnew...e_1000716.shtml

The strength and extent of the property boom can be seen in the fact that over a third of the current housing stock has been built in the past decade. Annual completions are 3.5 times what they were a decade ago, and the country has the highest per capita building rate in Europe.

Before anybody gets too excited about this, I think it's worth pointing out that it's very easy to make a model fit current trends but much harder to get it to predict the future. Even Excel does a reasonable job of modelling past trends in house prices but does a more questionable job of predicting the future. [imA20SomethingGetMeOutOfHere]

The model was developed using US demographic data and only then applied to data from other countries. The strong correlations seen in the non-US results suggest an inherent validity to the model.

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Could this impending demographic time bomb be the reason for the governments eagerness to open the borders???

In part I think it is. But the CBI also wanted a cheap supply of labour, they were facing wage inflation from the poorly paid which if it had happened, would have pulled millions of benifits and into the workplace. That would have benefitted the nation by reducing the benefits bill, however that is not the CBI's concern. It should be ours though.

In part I think it is. But the CBI also wanted a cheap supply of labour, they were facing wage inflation from the poorly paid which if it had happened, would have pulled millions of benifits and into the workplace. That would have benefitted the nation by reducing the benefits bill, however that is not the CBI's concern. It should be ours though.

Vote UKIP!.

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It's all coming together ... a bit like noticing that the US has occupied Iraq and Afghanistan, and then looking at them on a map in relation to Iran.

untitled.JPG

:lol:

I knew there must have been a reason behind the invasion of Iraq and Afghanistan :huh:

Hmmm. I'd be surprised if prices fell ~80%.

I hope they do, and by next week would be nice!

I've pasted a screen grab here:

untitled.JPG

It's interesting. Two things stand out:

1) There might be a few more years left for people to sell, and for people here to hold out and rent.

2) Property will be a terrible invesment in the long term from this point on. So maybe renting should be a lifetime option. I know that after the 1929 Wall Street crash (which was also a drawn out 90% nominal property crash in Manhattan) rents nominally fell for over a decade.

Where has this graph come from and where did its creator get his or her information?

Edited by cockrobin
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I just can’t help but think there’s more to this than meets the eye

The fact that the Federal Reserve has produced such a report – with such astonishing predictions seems…. Strange.

The fact that they have based their findings (regarding future house prices) almost entirely population size or age seems…. Strange.

Now.. we live in a time where the world’s population is the move, its not just poles moving to the UK it’s a global phenomenon – indeed many posters on this forum have considered moving abroad. Recent reports suggest that up to 10million brits are looking to do the same.

So.. My point is this: how on earth can the fed predict future house prices based solely on the predicted future population size/age – they haven’t got a clue where everyone will be.

More to the point: is it even the feds job to predict future population demographics – or is it the feds job to control the money supply.

I suspect the fed knows far more about how much the average person’s debt (and their ability or inability to pay it back) than they do about where people will be living 5 , 10, 20 , or even 30 years from now.

From the graphs at the bottom of the report we see that the fed is predicting future house prices in the US, UK, IRELAND and JAPAN.

Price predicted to fall from

UK 2012

US 2013

IRELAND 2033

Most important they suggest that prices should have started falling in JAPAN in 1993, but actually started falling in 1991 (and have fallen ever since).

Now I’m no economist but I was under the impression that the Japanese “bubble” had been created by the boj cutting interest rates in half in 1986 from 5% to 2.5%, fueling asset prices to unsustainable levels – then as inflation filtered into the general economy the boj hiked rates to 6% in 1989/ 1990……. And then POP. The bubble burst.

I’v never read or heard about it being anything to do with demographics.

In a nutshell I think the fed knows that a massive worldwide hpc is coming but they don’t want everyone to know what caused it.

Baby boomers my bottom.

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I just can’t help but think there’s more to this than meets the eye

The fact that the Federal Reserve has produced such a report – with such astonishing predictions seems…. Strange.

The fact that they have based their findings (regarding future house prices) almost entirely population size or age seems…. Strange.

Now.. we live in a time where the world’s population is the move, its not just poles moving to the UK it’s a global phenomenon – indeed many posters on this forum have considered moving abroad. Recent reports suggest that up to 10million brits are looking to do the same.

So.. My point is this: how on earth can the fed predict future house prices based solely on the predicted future population size/age – they haven’t got a clue where everyone will be.

More to the point: is it even the feds job to predict future population demographics – or is it the feds job to control the money supply.

I suspect the fed knows far more about how much the average person’s debt (and their ability or inability to pay it back) than they do about where people will be living 5 , 10, 20 , or even 30 years from now.

From the graphs at the bottom of the report we see that the fed is predicting future house prices in the US, UK, IRELAND and JAPAN.

Price predicted to fall from

UK 2012

US 2013

IRELAND 2033

Most important they suggest that prices should have started falling in JAPAN in 1993, but actually started falling in 1991 (and have fallen ever since).

Now I’m no economist but I was under the impression that the Japanese “bubble” had been created by the boj cutting interest rates in half in 1986 from 5% to 2.5%, fueling asset prices to unsustainable levels – then as inflation filtered into the general economy the boj hiked rates to 6% in 1989/ 1990……. And then POP. The bubble burst.

I’v never read or heard about it being anything to do with demographics.

In a nutshell I think the fed knows that a massive worldwide hpc is coming but they don’t want everyone to know what caused it.

Baby boomers my bottom.

I agree its very strange. But I think the actual figures represent the effect of the demographic portion of actual prices. The drift between actual and simulated could be represented by non demographic factors, hence the lack of total accuracy. However if the chart is anywhere near accurate then the future implications for property prices are very disturbing indeed

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I just can’t help but think there’s more to this than meets the eye

The fact that the Federal Reserve has produced such a report – with such astonishing predictions seems…. Strange.

The fact that they have based their findings (regarding future house prices) almost entirely population size or age seems…. Strange.

Now.. we live in a time where the world’s population is the move, its not just poles moving to the UK it’s a global phenomenon – indeed many posters on this forum have considered moving abroad. Recent reports suggest that up to 10million brits are looking to do the same.

So.. My point is this: how on earth can the fed predict future house prices based solely on the predicted future population size/age – they haven’t got a clue where everyone will be.

More to the point: is it even the feds job to predict future population demographics – or is it the feds job to control the money supply.

...

Baby boomers my bottom.

It wasn't written or issued by the Fed - see big disclaimer on the first page. Ultimately of course it all comes down to demographics - houses haven't changed in nature or intrinsic value, only the demand for them. It's a bit tautological, but basically prices go up when demand goes up and demand in aggregate can be predicted fairly accurately from the life-cycle behaviour of the 'normal' person.

By the way, the 10M UK emigration thing came from a survey of 1000 people and was extrapolated (I'm not sure the sample size or composition is adequate to do that for 50M people - it might well be).

Having skimmed the thesis it seems to be a remarkably good, clean and simple model. Has it been peer reviewed and what do the qualified statisticians and econometricians make of it?

An ironic feedback loop that his model does not seem to include is the effective economic sterilisation of a generation because of HPI (i.e. rational people waiting to start families until they can afford to buy a stable home):

unusual baby-boomer demographics -> unusual consumption growth -> extreme HPI cycle -> negative demographics -> HPC+ -> the mother of all recessions (AKA depression)

Whats the opposite of a baby-boom...how will the effects of that feed through over the next 10-20 years?

The system is inherently unstable as many more are now noticing.

JY

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Another point worth noting is that they predict that prices in the us will START falling in 2013 (see figure 8a)

I think even the bulls will admit that their falling NOW.

the prices there aren't falling wholesale,it's the likes of FL,CA,NY that are collapsing due to the weight of speculators.....our own housing model is very much like CA,so I would expect it to act accordingly.

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Before anybody gets too excited about this, I think it's worth pointing out that it's very easy to make a model fit current trends but much harder to get it to predict the future. Even Excel does a reasonable job of modelling past trends in house prices but does a more questionable job of predicting the future.

To show what I mean, attached is a screen dump from a spreadsheet of the house price data from the HPC front page. The black line is a trend line created in Excel based on a power series fit of the data. It manages to fit current data OK, but I think that even the most bearish of the posters here would agree that house prices becoming less than zero in a few years' time is slightly unrealistic.

Excel_HPC_Forcast.JPG

It could be my simplistic, literal take on this but surely this graph tends to zero because the data runs out. Sorry if it was not to be taken litterally.

All sounds too good to be true, but I think most people on here care less about the unreal value of their prospective homes than being able to afford a nice home for their family.

Given the acknowledged changing demographic, not enough workers to fill pension pots etc., when you think about it, there was always going to be a tipping point where there are far more homes than people. A few cold winters, what with fuel prices what they are, bye bye wrinklies, rising IRs, backlash against immigration (worrying flash of clarity there RE: Immigration being a sick plan to fill the population gap). Hold on tight. HPC blowing in on the wind :-) but :ph34r:

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That's not true. Real prices depend on real interest rates, which are much more stable. If you notice, the BoE keeps moving their nominal rate up and down to keep the real interest rate stable, as inflation waxes and wanes. You can know that real interest rates will be similar to today, and not know if the nominal base rate will be 27% or 3% next year.

I have noted a number of errors in the math, especially the differentiation performed as part of the model proof.

Thorough but flawed model.

#scoobydoo#

:ph34r:

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What exactly is going to turn around the demographic collapse of productive people in the West?

It is IMPOSSIBLE TO OVERSTATE the importance of that question!!!

All I can suggest towards an answer, is to try and pinpoint the factors that have CAUSED this disastrous collapse in the first place.

Fire away, folks.

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I have noted a number of errors in the math, especially the differentiation performed as part of the model proof.

Thorough but flawed model.

#scoobydoo#

:ph34r:

That's quite a claim / slur. Can you please back it up to show what you mean? I must admit I glazed over the maths but as Durch says it is unlikely to be wrong.

JY

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Another wonderful morning and another chance for the back-to-work crowd to see this lovely graph of UK real house prices, from an economist at the US Federal Reserve, based on government demographic projections fed into a normal asset pricing model:

untitled.JPG

As you can see the model produces a pretty good guess at past prices. If it's as good at guessing the future ones, well:

It might be best to rent for perhaps up to thirty years, until buying is cheaper than renting. So find somewhere comfy.

:lol:

If this model had been around in the 1930's would it have predicted the baby-boom and the subsequent impact on rates and HPI over the subsequent decades? I think not...

All it does is state the link between demographics and house prices, thus moving the prediction problem from being the prediction of house prices to one of predicting demographic trends. Seems an equally difficult task to me. It also works entirely in terms of real prices and interest rates. As mortgages are nominal debt contracts it makes a big difference whether the real interest rate occurs in a high or low inflation environment.

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As the main people interested in houses over this projection have already been born, the demographic forecasts are solid. The only difficult thing to factor is immigration/emmigration (as our government knows), but I think the arguments that most immigrants are temporary, living many to a room and funneling money home to buy houses there, not here, are valid.

one thing in my own area does concern me though, especially as I would like to buy a house there, sufficiently spacious to raise more than one child in. And this is that there remains a trend for these decent family houses to be rent asunder (pun intended) into HMOs or individual flats - designed to be crammed with immigrants. For professional property folk, it is *currently* the only way that a decent return can be gained in property. Certainly, my current landlord seems to be struggling...

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Blimey, looking at it, I see what you mean. I know that Prechter thinks it will be bigger than 1929.

just read about half of the book durch over the weekend (very interesting & also very heavy reading for a novice to economics), he is suggesting thst we are in or just starting the final 5 wave, but for a super cycle ?

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That's quite a claim / slur. Can you please back it up to show what you mean? I must admit I glazed over the maths but as Durch says it is unlikely to be wrong.

JY

I think they have left something out of the proof or I have just not seen it. I would need to see the full proof to validate if it is wrong or not as a published proof should have all assumptions stated. I will e-mail the author in guise of a researcher to see if he can supply me with the full proof. I am a physicist by training and not the greatest mathematician in the world but I have colleagues whom are pure mathematicians who will enjoy checking it over for me, sad but true.

#scoobydoo#

:ph34r:

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