Do House Prices Always Rise?

[UNSHURE]

I have just come across an amazing graph that might be of interest. It is the third graph down in the following link:

Schiller House Price Index

The graph charts US house prices from 1890 to today. The index is adjusted for inflation.

1890-1892

The index starts at 100. The first two years show an house price boom with the index shooting up to 125.

1892-1920

The next stage shows 1892-1920 shows a downward trend in prices (with a few brief upward swings along the way). In 1920, the index is around 50. This illustrates that it is possiible to see a 30 yearish downward swing in House prices with the end result being a 60%-70% drop in real terms.

1920-1941

The next stage shows house prices fluctuating between indexes of 50-80. Note, the price is still well below the starting index of 100 in 1890.

1941-1951

WW2, big inflation results in a massive upswing in house prices. Index ends at around 115. Note, this still hasn't yet reached the 1892 peak of 125.

1951-1978

Prices, adjusted for inflation are flat. Goes to show that it is possible to have a 30 yearish period in which house prices remain relatively constant in real terms.

1978 to 1995

This part of the graph resembles the one on the Home page on HousePriceCrash.com. It shows the last two House price booms, both followed by crashes. Both of these left house prices where they started from in real terms.

1995 to today

Index pushes the 200 mark.

The thing to note, however, that the 125 index mark is not reached until about 1998. It, therefore took about 106 years for house prices, in real terms, to get back to the height of the 1892 boom. The end of this graph leaves house prices looking dangerously high.

Points of Note:

House prices can fall, or remain flat, over very long periods of time.

Significant high peaks can be followed by sharp long term declines. Following the decline, it can take over a hundred years to get back to the peak again.

[Casual Observer]

I have just come across an amazing graph that might be of interest. It is the third graph down in the following link:

Schiller House Price Index

The graph charts US house prices from 1890 to today. The index is adjusted for inflation.

1890-1892

The index starts at 100. The first two years show an house price boom with the index shooting up to 125.

1892-1920

The next stage shows 1892-1920 shows a downward trend in prices (with a few brief upward swings along the way). In 1920, the index is around 50. This illustrates that it is possiible to see a 30 yearish downward swing in House prices with the end result being a 60%-70% drop in real terms.

1920-1941

The next stage shows house prices fluctuating between indexes of 50-80. Note, the price is still well below the starting index of 100 in 1890.

1941-1951

WW2, big inflation results in a massive upswing in house prices. Index ends at around 115. Note, this still hasn't yet reached the 1892 peak of 125.

1951-1978

Prices, adjusted for inflation are flat. Goes to show that it is possible to have a 30 yearish period in which house prices remain relatively constant in real terms.

1978 to 1995

This part of the graph resembles the one on the Home page on HousePriceCrash.com. It shows the last two House price booms, both followed by crashes. Both of these left house prices where they started from in real terms.

1995 to today

Index pushes the 200 mark.

The thing to note, however, that the 125 index mark is not reached until about 1998. It, therefore took about 106 years for house prices, in real terms, to get back to the height of the 1892 boom. The end of this graph leaves house prices looking dangerously high.

Points of Note:

House prices can fall, or remain flat, over very long periods of time.

Significant high peaks can be followed by sharp long term declines. Following the decline, it can take over a hundred years to get back to the peak again.

In my opinion, falls in inflation adjusted house prices are not a problem or discouragement to an owner occupier. In fact, if they aspire to moving up the ladder, they are a very good thing.

Most of the so-called falls in prices indicated by the graph on the home page weren't nominbal falls at all, and so were not of real concern to buyers.The 89-94 falls were real, however. Many on here think that the graph predicts a fall in nominal prices, whereas a fall in inflation adjusted prices is more likely.

[Eeyore]

In my opinion, falls in inflation adjusted house prices are not a problem or discouragement to an owner occupier. In fact, if they aspire to moving up the ladder, they are a very good thing.

Most of the so-called falls in prices indicated by the graph on the home page weren't nominbal falls at all, and so were not of real concern to buyers.The 89-94 falls were real, however. Many on here think that the graph predicts a fall in nominal prices, whereas a fall in inflation adjusted prices is more likely.

Are you writing/thinking about the USA or UK?

[Casual Observer]

Are you writing/thinking about the USA or UK?

The UK. I assumed the OP was trying to reflect the US experience onto the prospect for HPs in the UK.

[UNSHURE]

Are you writing/thinking about the USA or UK?

Markets in general. The graph is for USA. It would be even more interesting if someone had produced such a graph for the UK.

The point is that the Housing market does not necessarily need to be characterised by the short term boom bust scenario that we (US and UK) have experienced since the late 1970's. It is also possible to get long periods of time (30 years or so) in which house prices remain relatively flat. We could also get long periods of declining house prices (US 1892-1920 or Japan 1990-2005 are examples). Due to the astronomical overshooting of the upside, we could be in for a very long term downside.

[Eeyore]

The UK. I assumed the OP was trying to reflect the US experience onto the prospect for HPs in the UK.

1940s don't seem to fit with bearish theories.

Difficult to compare such diferent markets, the Japan bubble is often used to predict the UK.

http://www.economist.com/business/displays...y_id=E1_QDSJDNS

I wonder?

[UNSHURE]

1940s don't seem to fit with bearish theories.

Difficult to compare such diferent markets, the Japan bubble is often used to predict the UK.

http://www.economist.com/business/displays...y_id=E1_QDSJDNS

I wonder?

The 1940's show a large upswing in House Prices. However, this will be due to the US entry into WW2. During wartime, government expenditure rises dramatically. Governments sell bonds, but also borrow money from the financial system. This results in a large scale increase in money supply in the economy and hence inflation. House price increases would be caught up in this along with everything else.

It is difficult to use past bubbles to predict how current bubbles will end. The 1980's UK/US bubbles ended in a 5 year recession (approx), after which house prices, and the economy resumed their upward trend. The 1980's Japan bubble resulted in a fifteen year long recession. The 1892 USA housing bubble ended with house prices declining for 28 years and then flattening off.

I don't think that we can say what will happen when this bubble bursts. We might get a repeat of the early 1990's (short and sharp resuming growth five years later). We might get something more long term and serious. E.G. a twenty year downward correction.

What we do know however, is that bubbles burst and this one is a huge bubble.

[IamSpartacus]

What we do know however, is that bubbles burst and this one is a huge bubble.

Sure?

[Eeyore]

The 1940's show a large upswing in House Prices. However, this will be due to the US entry into WW2. During wartime, government expenditure rises dramatically. Governments sell bonds, but also borrow money from the financial system. This results in a large scale increase in money supply in the economy and hence inflation. House price increases would be caught up in this along with everything else.

But that's what I'm being told is happening now, money supply increasing, government borrowing... so it's similar.

[UNSHURE]

1940s don't seem to fit with bearish theories.

Difficult to compare such diferent markets, the Japan bubble is often used to predict the UK.

http://www.economist.com/business/displays...y_id=E1_QDSJDNS

I wonder?

The similarities between 1980's Japan and current UK/US economies:

Ageing Population (Boomer generations going into retirement)

Reasons for Japan Recession

Real estate and equity bubbles.

[Eeyore]

The similarities between 1980's Japan and current UK/US economies:

Ageing Population (Boomer generations going into retirement)

Reasons for Japan Recession

Real estate and equity bubbles.

You didn't reply about the similarities to 1940 HPI.

From the moneyweek article

Our forecast, at the H.S.Dent Foundation - and we have been largely correct thus far - is for the US economy and markets to boom for the rest of this decade.

The H.S. Dent Foundation has $7.7 million in assets, which he uses to “help people understand change"

Good for him, quite a celeb.

I want to understand.

[UNSHURE]

But that's what I'm being told is happening now, money supply increasing, government borrowing... so it's similar.

Yes it is very similar. Governments are printing money. They borrow from the financial system to pay their employees and suppliers. The borrowing is then paid for by more borrowing and so on. This is basically printing money. The money then enters the Private banking system where it is is used as the basis to create more loans. Mortgages and such. The relatively low interest rates make it favorable for borrowers who are encouraged to overstretch themselves.

The result of all this is increasing money supply being fed directly into the various bubbles (housing in particular). This is very inflationary even though it gets understated in the RPI.

The problem with governments, banks and consumers behaving this way is that it is not sustainable in the long term. It might work to fund a five year long war but it can't be sustained for ever. Sooner or later, individuals get overstretched. they then cut spending and cease to borrow money. Demand falls, the bubble bursts and the economy goes into a tailspin.

Creature from Jeckyl Island

[Guest muttley]

whereas a fall in inflation adjusted prices is more likely.

With inflation running at 2-3%, wouldn't you expect that to translate into nominal falls?

[BandWagon]

The 1940's show a large upswing in House Prices. However, this will be due to the US entry into WW2. During wartime, government expenditure rises dramatically. Governments sell bonds, but also borrow money from the financial system. This results in a large scale increase in money supply in the economy and hence inflation. House price increases would be caught up in this along with everything else.

The housing market in the US jumped when servicemen returned, so from 1944 to about 1948.

Schiller attributes this to the baby boomers, servicemen coming home from war starting families, so there was a sudden surge in demand for accommodation.

Also the Great Depression only really ended with the outbreak of WWII, so many of these people had only known poverty and war. What a life.

They came back to a bustling economy and peace.

Unlike many of their European counterparts, the US did quite nicely out of WWII, but not quite as well as they did out of WWI.

Edited November 12, 2006 by BandWagon

[Eeyore]

Yes it is very similar. Governments are printing money. They borrow from the financial system to pay their employees and suppliers. The borrowing is then paid for by more borrowing and so on. This is basically printing money. The money then enters the Private banking system where it is is used as the basis to create more loans. Mortgages and such. The relatively low interest rates make it favorable for borrowers who are encouraged to overstretch themselves.

The result of all this is increasing money supply being fed directly into the various bubbles (housing in particular). This is very inflationary even though it gets understated in the RPI.

The problem with governments, banks and consumers behaving this way is that it is not sustainable in the long term. It might work to fund a five year long war but it can't be sustained for ever. Sooner or later, individuals get overstretched. they then cut spending and cease to borrow money. Demand falls, the bubble bursts and the economy goes into a tailspin.

So what was different in 1940 and onwards, on this basis they should have had a fall in house prices? I'm interested and don't know why.

Creature from Jeckyl Island

I hate conspiracy theories. But why a conspiracy?, JP Morgan, and the like, already ran the shop. They didn't need to make it happen.

It like G Bush having a secret meeting next week to conspire to become president.

The housing market in the US jumped when servicemen returned, so from 1944 to about 1948.

Schiller attributes this to the baby boomers, servicemen coming home from war starting families, so there was a sudden surge in demand for accommodation.

Also the Great Depression only really ended with the outbreak of WWII, so many of these people had only known poverty and war. What a life.

They came back to a bustling economy and peace.

So the debt, inflation doesn't matter?

Edited November 12, 2006 by Eeyore

[JohnG]

With inflation running at 2-3%, wouldn't you expect that to translate into nominal falls?

You need to compare it with wage inflation (4%ish pa) not Mickey Mouse CPI.

[Guest wrongmove]

Well that housing graph shows something useful - in the 40's prices rocketed up, and then stayed there. I'll bookmark this for the next time someone screams - "there has never been a bubble that didn't burst"

[Eeyore]

Well that housing graph shows something useful - in the 40's prices rocketed up, and then stayed there. I'll bookmark this for the next time someone screams - "there has never been a bubble that didn't burst"

You can never be sure. It might still be a massive baby boomer bubble.

[IamSpartacus]

Well that housing graph shows something useful - in the 40's prices rocketed up, and then stayed there. I'll bookmark this for the next time someone screams - "there has never been a bubble that didn't burst"

I imagine you won't have long to wait...

[Guest muttley]

You need to compare it with wage inflation (4%ish pa) not Mickey Mouse CPI.

Apologies.With inflation running at 4%, wouldn't you expect that to translate into nominal falls?

[IamSpartacus]

You can never be sure. It might still be a massive baby boomer bubble.

In the forties, even the oldest boomers were under the age of 10.

[Eeyore]

In the forties, even the oldest boomers were under the age of 10.

Precocious, the yanks.

I'm left with the conclusion that inflation and government debt, money supply have no impact on the housing market. At least by the 1940 evidence from the USA.

[Guest Charlie The Tramp]

Of course there was a house price boom in the 1940s.

Interest Rate were cut to 2% on 26th October 1939 and were held until 8th November 1951when they were raised to 2.5%.

At those rates it was not a big deal if your house got bombed.

[Eeyore]

Of course there was a house price boom in the 1940s.

Interest Rate were cut to 2% on 26th October 1939 and were held until 8th November 1951when they were raised to 2.5%.

At those rates it was not a big deal if your house got bombed.

The boom is not in question - I hope.

Why no fall considering the economic climate?

[Casual Observer]

With inflation running at 2-3%, wouldn't you expect that to translate into nominal falls?

Wage inflation is the relevant type here, not price inflation.

With earnings growing at about 4.5% it would only take 4 or 5 years of stagnating prices to get a significant correction.