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danlightbulb

Crash Expectations Too High

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Hi all,

I've been following this forum for a few months now, and as i'm trying to sell my house am obviously interested in whether or not there will be a crash.

In looking at the various graphs of house price, such as the one displayed prominently on the front page of the site, I though to myself, what does the 'real' house price actually mean.

The real house price is adjusted for inflation. This has the effect of exaggerating the extent of the crash that happened in the early 90's.

crashcomparison.jpg

I suggest that to use the real house price graph is incorrect, as in reality prices didn't drop as far as the real house price data suggests. If we go back further to the 1980 peak, we can see that a crash in real prices didn't actually cause any reduction in actual prices.

This is why I now tend to believe in stagnation rather than a crash.

Would appreciate points of view on this! (and please don't rip my logic apart i'm not an economist!)

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from sellers' POV it pays to discount price so as to get money earlier b4 it is eaten away by inflation

Prices will not stand still in free market economy. only if they were regulated by gvt

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Hi all,

I've been following this forum for a few months now, and as i'm trying to sell my house am obviously interested in whether or not there will be a crash.

In looking at the various graphs of house price, such as the one displayed prominently on the front page of the site, I though to myself, what does the 'real' house price actually mean.

The real house price is adjusted for inflation. This has the effect of exaggerating the extent of the crash that happened in the early 90's.

crashcomparison.jpg

I suggest that to use the real house price graph is incorrect, as in reality prices didn't drop as far as the real house price data suggests. If we go back further to the 1980 peak, we can see that a crash in real prices didn't actually cause any reduction in actual prices.

This is why I now tend to believe in stagnation rather than a crash.

Would appreciate points of view on this! (and please don't rip my logic apart i'm not an economist!)

You are right in part. I don't see the headline figure dropping more than 25% nominally at the very worst case, but wage inflation has fallen to just 3%, in the nineties it was near 9%. Inflation is not going to play as a significant role as it did last time or the seventies in masking falls. A big mortgage is going to be a big mortgage for a very long time.

Also houses don't depreciate uniformly. They'll be areas and specific houses that will drop 50%+. In a crash/correction the buyers gets to set the terms. They'll also be a large number of repossessed properties at auction. For those canny buyers/investors with cash in the bank it will be happy hunting time, but it takes a few years before the big drops become apparent. Sellers'll be denial in year one. Fearful in year two. And acceptance in year three.

Be prepared to wait.

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The real house price is adjusted for inflation. This has the effect of exaggerating the extent of the crash that happened in the early 90's.

I suggest that to use the real house price graph is incorrect, as in reality prices didn't drop as far as the real house price data suggests. If we go back further to the 1980 peak, we can see that a crash in real prices didn't actually cause any reduction in actual prices.

No no no no no.

The point of plotting the graph in inflation-adjusted terms is that it shows you what is really going on with the price of an asset, in terms of what you could go out and buy with the money it's worth.

Economists call inflation adjusted prices "real" prices, and non-adjusted prices "nominal" prices. That's because a nominal price level (£30, £300) is just a name - it's meaningless unless you also know what can be bought for £1.

It is quite true that most of the losses in the early 1990s were not large in nominal terms. You may be right that this will be the way it happens this time around, too. A lot of this is down to market psychology - people don't want to take a nominal loss when they sell an asset ("I paid £500,000 and I'm not accepting a penny less"). But this is not sensible. If your house's nominal value stays the same for three years while inflation runs at 3% p.a. then your house is depreciating in value. It's as simple as that.

People who think and make decisions in purely nominal terms are said (by economists) to be suffering from inflation illusion.

Now we can all argue about how to measure the price level in order to do the inflation adjustment. (Or not.)

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Guest AuntJess
You are right in part. I don't see the headline figure dropping more than 25% nominally at the very worst case, but wage inflation has fallen to just 3%, in the nineties it was near 9%. Inflation is not going to play as a significant role as it did last time or the seventies in masking falls. A big mortgage is going to be a big mortgage for a very long time.

Also houses don't depreciate uniformly. They'll be areas and specific houses that will drop 50%+. In a crash/correction the buyers gets to set the terms. They'll also be a large number of repossessed properties at auction. For those canny buyers/investors with cash in the bank it will be happy hunting time, but it takes a few years before the big drops become apparent. Sellers'll be denial in year one. Fearful in year two. And acceptance in year three.

Be prepared to wait.

My Ma in law lived in a 'posh' suburb of a northern town, in a very large pre-war semi. These had been going for 125K in 1990. When she died in 1995, her offspring got 76K for it!! I would have thought her house would have held value. They are now going for 300K +!! :o . I reckon they need a serious 'correction'.

Edited by AuntJess

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Guest DissipatedYouthIsValuable
My Ma in law lived in a 'posh' suburb of a northern town, in a very large pre-war semi. These had been going for 125K in 1990. When she died in 1995, her offspring got 76K for it!! I would have thought her house would have held value. They are now going for 300K +!! :o . I reckon they need a serious 'correction'.

Quite. I'm holding off for 2 years - unless my wages inflate significantly rather than at about 3%/year then I'll either offer 60% roughly of today's prices or emigrate with a large deposit.

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If your house's nominal value stays the same for three years while inflation runs at 3% p.a. then your house is depreciating in value. It's as simple as that.

I agree, but it really doesn't matter because it is the 'nominal value' that is going to cover your mortgage.

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You are right in part. I don't see the headline figure dropping more than 25% nominally at the very worst case,

That doesn't make sense at all. We have record debts and signs that a world wide asset bubble is about to pop. We have the most expensive houses in the world and biggest property bubble in history. Unemployment is rising and the nation are living off MEW. We are in uncharted territory. How can you preduct where the slide will stop?

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From the graph real prices inflation adjusted to todays £

1983 £65,000 after 16% fall

1996 £70,000 after 37% fall

2006 £170,000

2010 £ X after Y% fall

My guess for X is £85,000, in 2007 values (say £100,000 in 2010 allowing for inflation), and Y% = 50% in real terms.

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That doesn't make sense at all. We have record debts and signs that a world wide asset bubble is about to pop. We have the most expensive houses in the world and biggest property bubble in history. Unemployment is rising and the nation are living off MEW. We are in uncharted territory. How can you preduct where the slide will stop?

I can't, I don't know the future, but anything less than 25% nominal fall is historically severe. Would happily take a 75% drop, but I don't think it is wise to plan on it.

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Hi all,

I've been following this forum for a few months now, and as i'm trying to sell my house am obviously interested in whether or not there will be a crash.

In looking at the various graphs of house price, such as the one displayed prominently on the front page of the site, I though to myself, what does the 'real' house price actually mean.

The real house price is adjusted for inflation. This has the effect of exaggerating the extent of the crash that happened in the early 90's.

crashcomparison.jpg

I suggest that to use the real house price graph is incorrect, as in reality prices didn't drop as far as the real house price data suggests. If we go back further to the 1980 peak, we can see that a crash in real prices didn't actually cause any reduction in actual prices.

This is why I now tend to believe in stagnation rather than a crash.

Would appreciate points of view on this! (and please don't rip my logic apart i'm not an economist!)

Good God man, you mean to say we've never had great crash zero or great crash one :o Great crash two is gonna be huge then eh? :blink: I like your simple theory, it works.

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I agree, but it really doesn't matter because it is the 'nominal value' that is going to cover your mortgage.

Not sure exactly what you mean by that, but yes, if the nominal price of your house stays constant throughout the term of your mortgage then you will never be in negative equity, which is one of the more serious risks in a correction.

If you really don't care about your house as an investment, then sure, you can accept whatever real losses you want. But since buying a house is the biggest investment most people ever make in their lives, it would seem sensible to consider the risks - in particular, the risk that by the time you've paid off your mortgage and you own your house outright, it's no longer worth what you thought it would be worth.

Personally I prefer to be earning interest on the assets I hold while watching them appreciate in value, rather than paying interest for 25 years on a loan taken out to buy an asset that's depreciating in value. Your mileage may vary. :-)

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I suggest that to use the real house price graph is incorrect, as in reality prices didn't drop as far as the real house price data suggests. If we go back further to the 1980 peak, we can see that a crash in real prices didn't actually cause any reduction in actual prices.

It certainly did in my flat. Bought at £51k, went up to £65k, dropped to £35-40k. Huge nominal drops and even bigger real drops. That was in the Thames Valley BTW.

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When looking at charts of prices over decades, nominal price is meaningless. £1 in 1960 has nothing to do with £1 in 1999.

So it is vital to correct for inflation.

What the OP refers to is stagnation, where imply that nominal prices stay the same while inflation reduces the real value of the house. I believe this happened in the 1970s.

Whether it could happen now will depend on what happens to inflation in coming months and years. Personally I believe we will see nominal falls as well as real falls, but if inflation continues to rise, I may be wrong.

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Hi all,

I've been following this forum for a few months now, and as i'm trying to sell my house am obviously interested in whether or not there will be a crash.

In looking at the various graphs of house price, such as the one displayed prominently on the front page of the site, I though to myself, what does the 'real' house price actually mean.

The real house price is adjusted for inflation. This has the effect of exaggerating the extent of the crash that happened in the early 90's.

crashcomparison.jpg

I suggest that to use the real house price graph is incorrect, as in reality prices didn't drop as far as the real house price data suggests. If we go back further to the 1980 peak, we can see that a crash in real prices didn't actually cause any reduction in actual prices.

This is why I now tend to believe in stagnation rather than a crash.

Would appreciate points of view on this! (and please don't rip my logic apart i'm not an economist!)

Completely agree. The average guy on the street doesn't care if his house loses money in real terms. He just cares that he isn't in negative equity. Of course if the front page of this site showed the graph as nominal house prices then the situation doesn't look as bleak and previous crashes not as severe.

This of course creates an interesting juxterposition. The members of this forum berating the BTL brigade for treating houses as investment, yet show real house prices because this more accurately represents investment performance. Can't have it both ways people. :P

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Good God man, you mean to say we've never had great crash zero or great crash one :o Great crash two is gonna be huge then eh? :blink:

lol I hadn't though of it like that!

I suppose I am saying that there was a brief period of stagnation in 80, and a crash in 90. However the 90 crash only put prices back onto the long term trendline, which in nominal terms was an 18% drop.

Plus, looking at the nominal prices, in 90 prices peaked, and then took a dive for a year. By 91 it was all over and the market simply stagnated for 3 years then.

I think we are already seeing 5 to 10% reductions in many areas. I myself have had to reduce my asking price to try to sell (and still not sold). I reckon that will be it and in a year it will all be over and we'll simply stagnate at that level for a few years. So my prediction is a 10% drop for a year then stagnation for 3 years.

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When looking at charts of prices over decades, nominal price is meaningless. £1 in 1960 has nothing to do with £1 in 1999.

So it is vital to correct for inflation.

What the OP refers to is stagnation, where imply that nominal prices stay the same while inflation reduces the real value of the house. I believe this happened in the 1970s.

Whether it could happen now will depend on what happens to inflation in coming months and years. Personally I believe we will see nominal falls as well as real falls, but if inflation continues to rise, I may be wrong.

Wage inflation is the only inflation that matters. It is current 3.0% down from 4.3%.

To quote Danny Blanchflower:

"Wage inflation is the dog that hasn't barked." (And something to do with dropping IRs -13%)

OK, just lost all credibility there

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If you read the last Nationwide release we are told that debt stays around longer in a low inflation environment.

What inflation rate are you adjusting to ?

CPI , RPI, RPIX ?

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Completely agree. The average guy on the street doesn't care if his house loses money in real terms. He just cares that he isn't in negative equity. Of course if the front page of this site showed the graph as nominal house prices then the situation doesn't look as bleak and previous crashes not as severe.

I'm sure all the people whose lives were ruined by the last crash will take comfort in your revelation that it didn't really happen - they just should've drawn the graph differently. If the average guy on the street doesn't care about losing money, then that's exactly where he will end up - on the street.

This of course creates an interesting juxterposition. The members of this forum berating the BTL brigade for treating houses as investment, yet show real house prices because this more accurately represents investment performance. Can't have it both ways people. :P

Houses are an investment, whether you like it or not. They're usually the biggest single investment that an average person will make in their lifetime (think there's an echo in here). Yes, it would be wonderful if houses didn't have to be an investment, but that's the hand that capitalism deals us. I think most people I've heard posting here wouldn't disagree with that.

Personally, I would berate the BTLers for being greedy, for making stupid investment decisions, for acting like sheep, and for not being able to add up.

If more people treated houses as an investment, rather than "just a place to live", then they would think more carefully before plunging themselves into a lifetime of painful debt repayment in the pursuit of their dream of owning a house.

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I'm sure all the people whose lives were ruined by the last crash will take comfort in your revelation that it didn't really happen - they just should've drawn the graph differently. If the average guy on the street doesn't care about losing money, then that's exactly where he will end up - on the street.

Are you being deliberately obtuse? <_<

I think the point the OP was making was that previous crashes (the cyclical troughs following the peaks, as plotted on the HPC graph) were in most cases invisible on the ground as nominal prices remained positive.

The fact is that it wasn't negative equity that forced people on to the streets in the early 1990s; it was the punishing interest rate increases and the economic chaos. People didn't sell their comfortable family homes and opt for B&B accomodation because the perceived value of their "investment" had dipped.

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Guest AuntJess
Quite. I'm holding off for 2 years - unless my wages inflate significantly rather than at about 3%/year then I'll either offer 60% roughly of today's prices or emigrate with a large deposit.

My nephew went to the US having sold a good-sized pre-war semi in 2000. You should see the house that he bought there :o ... massive, with a 'cellar' larger than the average flat here - for guests. His kitchen was the twice the size of an average lounge here. :blink:

You get more for your money abroad.

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....... as in reality prices didn't drop as far as the real house price data suggests. If we go back further to the 1980 peak, we can see that a crash in real prices didn't actually cause any reduction in actual prices.

Perhaps you weren't involved in the housing market in the late 80's/90's?

I was and I can recall huge reductions in prices across the country from London to the North. I remember a documentary in the early nineties about homeowners in London who had bought houses in the peak of 88/89 and were now struggling to pay their debts but were having their properies valued at 40% less than they had bought them for. Negative equity were the buzzwords round that time and defaults and repossessions the order of the day.

It was a bloodbath in London but many other parts of the country were affected also. I bought a place south of Manchester for £125,000 in 89 and by 1992 estate agents were valuing it at £80,000 tops. Not only that but buyers were thin on the ground and sales volumes had slumped.

The interest rates were higher back then of course but the levels of debt were miniscule compared to today, which is why I suspect this next crash will dwarf the last one.

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Are you being deliberately obtuse? <_<

What, on the Internet? Nah, no-one does that.

The fact is that it wasn't negative equity that forced people on to the streets in the early 1990s; it was the punishing interest rate increases and the economic chaos. People didn't sell their comfortable family homes and opt for B&B accomodation because the perceived value of their "investment" had dipped.

Interest rates are only "punishing" if you've borrowed too much money.

I just think it's a bit rich to turn round today and say that the 1990s crash wasn't a big deal, which was effectively what the original poster sounded like they were saying. I'm sure you can draw the graphs in such a way as to make the Great Depression look like an insignificant blip, but that doesn't change history.

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