A Relook At The The Recessionary Factor

[Flat Bear]

If we take out all the "noise", supply & demand, interest rates, unemployment, speculation, affordability, credit, debt, etc etc and look at the relationship between recessions and house prices, or to be more exact, GDP and house prices in real or perhaps nominal terms what do we find?

looking at some data from the ONS site I have found GDP growth at market prices (chaied volume measure) from 1949 when first available from ONS.

(http://www.statistics.gov.uk/elmr/01_07/downloads/ELMR01_07Anagboso.pdf)

ONS produces quarterly and annual

estimates of UK GDP, in both current prices

and chained-volume terms (see Robjohns,

2006). Annual estimates are available from

1948 while quarterly estimates are available

from 1955 quarter one. Figure 1 shows

annual GDP growth in volume terms.

The graph shows that, since 1948, there

have been three discernable periods of

recession: 1974–75, 1980–81 and 1991.

The first recession since the war (1974–75)

followed very vigorous growth in the

opening years of the 1970s, and coincided

with a large jump in oil prices, a sharp

rise in inflation, and acceleration in wage

growth. The 1.4 per cent fall of GDP in

1974 broke the run of uninterrupted growth

since the official data began. The early

1980s’ recession saw the largest post-war fall

in GDP of 2.1 per cent in 1980. In the most

recent recession of the early 1990s, GDP fell

by 1.4 per cent in 1991.

Source: Office for National Statistics

looking at the graph in this report fig 1 there were in fact 3 times gdp fell bellow zero that was 1974 then in 1980/81 and then around 1991

since 1949 there had been a couple of occasions gdp fell below 2% (which seems to be the axis) that was in 1952/53 and then in 1956 to 1958 when GDP seemed less volatile

Without looking at any house price data, if GDP could really indicate booms and busts in housing this is how I would read it (i honestly havnt looked at data yet although I am aware of certain dates)

1952 showed a steep fall in gdp before rising by 1954ish

but then in 1955 dropping again for 2 or maybe 3 years before recovering quickly by 1960 a quick dive and a steep boom till 1965.

Although growth was over 2% for a prolonged period in the late 60s it looked benign.

1972 saw a fantastic boom with phenominal growth the biggest of all which lasted less than 1 year and then the biggest bust of all in around 1974 (things must have looked bleak) a revival after around a year to just over norm before the deepest recession of all in 1980/81.

In 1981 a steadier boom that plateaued 1n 1982/3 and a long boom for 5 years before a slow steady slide into recession that started in 1988 this slide hit bottom in early 1992 and slowly a revival starting in 1992 peaked in late 1994

Since then there seems to have been a fairly long period of high GDP very very slowly dropping down to 1995. (end of graph)

A more up to date short term graph shows a decline in quarter 1 2005 which recovers quickly

SO

houses prices should have fallen in 1953ish

risen steeply in 1954

Dropped in 1955 for 2 years

rise in 1958 strongly dropping off in 1961 before a steady rise throughout the 60s

in 1970 a massive rise should have been seen peaking in 1973

a quick and dramatic fall in 1973 recovering by 1975 only to fall again in 1979 into negative territory (dont remember this)

prices should have risen steadily from 1981 before increasing strongly till 1988 where a fairly dramatic bust should have taken place that would have lasted till around 1993 before a steady slow boom starting in around 1993/4 which should have seen a very long continued boom although not necessarily spectacular lasting up to this time. (maybe a dip in 2005 1st quarter)

1953 bust

1954 boom

1955 slow down

1959 boom

1961 slow down

1961 boom steady

1970 big boom

1973 massive bust

1975 boom steady

1979 slow bust

1981 boom long and steady before increasing into big boom

1988 long steady big bust

1994 slow very long boom till today

I want to see what happened to house prises especially in the 70s and very early 1980s

[oracle]

If we take out all the "noise", supply & demand, interest rates, unemployment, speculation, affordability, credit, debt, etc etc and look at the relationship between recessions and house prices, or to be more exact, GDP and house prices in real or perhaps nominal terms what do we find?

looking at some data from the ONS site I have found GDP growth at market prices (chaied volume measure) from 1949 when first available from ONS.

(http://www.statistics.gov.uk/elmr/01_07/downloads/ELMR01_07Anagboso.pdf)

ONS produces quarterly and annual

estimates of UK GDP, in both current prices

and chained-volume terms (see Robjohns,

2006). Annual estimates are available from

1948 while quarterly estimates are available

from 1955 quarter one. Figure 1 shows

annual GDP growth in volume terms.

The graph shows that, since 1948, there

have been three discernable periods of

recession: 1974–75, 1980–81 and 1991.

The first recession since the war (1974–75)

followed very vigorous growth in the

opening years of the 1970s, and coincided

with a large jump in oil prices, a sharp

rise in inflation, and acceleration in wage

growth. The 1.4 per cent fall of GDP in

1974 broke the run of uninterrupted growth

since the official data began. The early

1980s’ recession saw the largest post-war fall

in GDP of 2.1 per cent in 1980. In the most

recent recession of the early 1990s, GDP fell

by 1.4 per cent in 1991.

Source: Office for National Statistics

looking at the graph in this report fig 1 there were in fact 3 times gdp fell bellow zero that was 1974 then in 1980/81 and then around 1991

since 1949 there had been a couple of occasions gdp fell below 2% (which seems to be the axis) that was in 1952/53 and then in 1956 to 1958 when GDP seemed less volatile

Without looking at any house price data, if GDP could really indicate booms and busts in housing this is how I would read it (i honestly havnt looked at data yet although I am aware of certain dates)

1952 showed a steep fall in gdp before rising by 1954ish

but then in 1955 dropping again for 2 or maybe 3 years before recovering quickly by 1960 a quick dive and a steep boom till 1965.

Although growth was over 2% for a prolonged period in the late 60s it looked benign.

1972 saw a fantastic boom with phenominal growth the biggest of all which lasted less than 1 year and then the biggest bust of all in around 1974 (things must have looked bleak) a revival after around a year to just over norm before the deepest recession of all in 1980/81.

In 1981 a steadier boom that plateaued 1n 1982/3 and a long boom for 5 years before a slow steady slide into recession that started in 1988 this slide hit bottom in early 1992 and slowly a revival starting in 1992 peaked in late 1994

Since then there seems to have been a fairly long period of high GDP very very slowly dropping down to 1995. (end of graph)

A more up to date short term graph shows a decline in quarter 1 2005 which recovers quickly

SO

houses prices should have fallen in 1953ish

risen steeply in 1954

Dropped in 1955 for 2 years

rise in 1958 strongly dropping off in 1961 before a steady rise throughout the 60s

in 1970 a massive rise should have been seen peaking in 1973

a quick and dramatic fall in 1973 recovering by 1975 only to fall again in 1979 into negative territory (dont remember this)

prices should have risen steadily from 1981 before increasing strongly till 1988 where a fairly dramatic bust should have taken place that would have lasted till around 1993 before a steady slow boom starting in around 1993/4 which should have seen a very long continued boom although not necessarily spectacular lasting up to this time. (maybe a dip in 2005 1st quarter)

1953 bust

1954 boom

1955 slow down

1959 boom

1961 slow down

1961 boom steady

1970 big boom

1973 massive bust

1975 boom steady

1979 slow bust

1981 boom long and steady before increasing into big boom

1988 long steady big bust

1994 slow very long boom till today

I want to see what happened to house prises especially in the 70s and very early 1980s

TRY ADJUSTING YOUR FIGURES FOR INFLATION!!...THAT'LL SHOW YOU WHY THE CRASH OF THE 1970'S DIDN'T HAPPEN(nominally)

[Flat Bear]

It does look like there is a definate link between house prices and GDP, but it seems there can be delays of up to 18 months in house prices.

It does not look as if any sort of significant drop in house prices can occur without a major recession unless things are definately different this time.

Many other people on this forum actually say this in different ways. It really does look as if nothing is going to create a crash unless a recessionary period is entered into.

It has to be remembered we are in a particularly long higher GDP cycle, longer than any other since 1949 at least so this boom has gone on for a long time. It is also worth noting that japan has been in an equally long low GDP cycle which should have seen continued lowering of house prices, which I believe they have although I havent got figures. Its possible there is some sort of inverse relationship between the 2 economies? based on their cheap credit? but maybe not.

The thing is, if we can predict when a recession will occur, and the severity, we'll know when house prices will fall. Give or take 18 months.

[BandWagon]

The thing is, if we can predict when a recession will occur, and the severity, we'll know when house prices will fall. Give or take 18 months.

This is the biggest economic myth around, and it's perpetuated by the media in their ignorance (and probably other reasons).

Housing busts LEAD economies into recession. You don't need a recession to have a housing bust, they happen first, then the recession follows.

If you have a problem believing this, have a look at what is happening in the US at the moment.

There are very good reasons why this occurs, but you'll need to do quite a bit of research to find out why.

What ever you do, don't take my word for it, find a few good books on economic history and start reading...

Edited June 29, 2007 by BandWagon

[bachelor]

This is the biggest economic myth around, and it's perpetuated by the media in their ignorance (and probably other reasons).

Housing busts LEAD economies into recession. You don't need a recession to have a housing bust, they happen first, then the recession follows.

IIRC someone posted a very good chart showing this to be the case.

Can't find it though, sorry. Can anyone help?

[CrashConnoisseur]

[Flat Bear]

This is the biggest economic myth around, and it's perpetuated by the media in their ignorance (and probably other reasons).

Housing busts LEAD economies into recession. You don't need a recession to have a housing bust, they happen first, then the recession follows.

If you have a problem believing this, have a look at what is happening in the US at the moment.

There are very good reasons why this occurs, but you'll need to do quite a bit of research to find out why.

What ever you do, don't take my word for it, find a few good books on economic history and start reading...

In fact it is the case

There has never been a significant house price correction without a concurrent drop in gdp.

Do your own research.

[libspero]

Here is a graph of gdp covering the last crash.

gdp seems to start dropping slightly before the crash, but doesn't go negative until well after the crash.

It looks to me as though the massive increase in interest rates to curb inflation before either event causes the GDP to start dropping.

Then the housing market starts to tumble, then gdp goes negative.

[bachelor]

Thanks JR.

[Ash4781]

Is there a Sterling crisis in each of those scenarios where the result is a drastic fix to the public finances , massive layoffs ?

[Flat Bear]

Here is a graph of gdp covering the last crash.

gdp seems to start dropping slightly before the crash, but doesn't go negative until well after the crash.

It looks to me as though the massive increase in interest rates to curb inflation before either event causes the GDP to start dropping.

Then the housing market starts to tumble, then gdp goes negative.

I have noticed the same thing in most cases, I may have some figures slightly out of kilter but on a couple of occasions it looked as if there was an 18 month delay in house price movement but I was also looking a raw data.

There have been 3 official recessions since the 2nd world war and on each occasion we have entered the official definition of a recession after house prices have started to fall as seen in jeff ross's chart.

So it has always been the case that GDP has fallen at least for a short period before house prices start to slow/reduce in price, but by the time growth (GDP) goes negative house prices falls would be well under way. Do you think this would be a fair statement of the facts to date?

I also have also noted from Jeff Ross's graph that prices continue dropping and a further lag is seen when prices rise only after GDP has recovered for a time.

[Flat Bear]

But

even if we now know there is a definate correlation between gdp and house prices how does this help?

Is it easier to forecast a slowing in GDP or even a recession?

Is the GDP forecast going down for the next year or two?

[downandout]

I would suggest that, if anything, this issue will demonstrate the change in the importance of the housing market in the economy.

I doubt very much whether falling house prices in the 1950s could have been the cause, or significant cause of a recession or fall in GDP. Up until the 80s and possibly the 90s, I would argue that house prices would only have fallen as a consequence of other economic factors and therefore a fall in GDP would have preceded a fall in house prices.

But things have changed and this time there is every chance that falling house prices could lead us into a recession or at least a decline in GDP growth, rather than the otherway round.

[Xurbia]

But

even if we now know there is a definate correlation between gdp and house prices how does this help?

Is it easier to forecast a slowing in GDP or even a recession?

Is the GDP forecast going down for the next year or two?

I'm interested to know if a government can cover up a recession? I'm very suspcious of all government data. It is obvious that inflation data is manipulated to be meaningless so why not growth rate?

[FTBagain]

But

even if we now know there is a definate correlation between gdp and house prices how does this help?

Is it easier to forecast a slowing in GDP or even a recession?

Is the GDP forecast going down for the next year or two?

Forecasting is guessing supported by expensive modeling. Who can tell what tomorrow will bring? But if you want a best guess then check out these comments.

http://www.housepricecrash.co.uk/forum/ind...showtopic=50278

There is a lot of talk in there about reducing disposable income. This I would suggest is a good indicator that the economy is close to or is slowing. This could be the initial reduction in GDP. Hence events could be following the same old pattern.

[steve99]

Looking at that graph tells me that one of two things is going to happen when it fianly points downwards again. For both outcomes the following will happen, house prices will drop back to 3and1/2 times wages or less as per every other previous crash. First posibility, nominal prices will not drop much overall as per previous crashes, maybe 5 - 7 % on avrerage , in this case the house price ratio drops back to 3ish on account of wages rising considerably to match the house pirces (as per previous crashes), or nominal prices will drop by 50% while wages remain static. As current thining in government economic circles is to keep wages low by what ever means possible then I sugest the second scenario will play out, this is more likely than in the past due to outsoursing, imported labour and the lack of unionised labour. For those that have saved their money this of course would be the very best outcome, however the govenment and banks have been leaning towards borrowers and spenders and may prefer the first possibility I mentioned.

[Flat Bear]

Andrew Farlow seems to have understood there is a major significance between GDP and house prices where GDP is seen as a prominant factor in many of his papers.

But he has always introduced extra "noise" from one factor or another and has not correlated GDP soley against house prices with an axis of average GDP (around 1.8%?) and if correlating against house prices measured as multiple of average wage around 3.7? It is this I believe could show us what the multitude of correlations he has done can not.

If we look at his 2005 paper "UK house prices, consumption and GDP in global context" some of the graphs are very close to the mark including one very similair to jeff ross's earlier in this thread with just some interest rate noise (page 5 I think)

This paper can be found @ http://www.economics.ox.ac.uk/members/andrew.farlow/Farlow%20House%20Prices%20and%20Consumption.ppt for those who need to remind themselves or those that have never viewed this report.

There may be one or two people who have not viewed many of Andrew's papers or who have never heard of him? If this is the case it would be very worthwhile for anyone remotely interested in the likely direction of house prices.

Andrew Farlow is the leading authority on the economy relating to house prices and has been predicting a possible crash in house prices for some time. He has produced several economic papers which he has lectured on. I am in no way saying that any of his arguments are wrong, in fact the contary, I am just pointing out maybe some factors could be put into isolation and maybe then patterns can emerge not already clear.

I would also be interested on peoples views on Andrew Farlow. Was he right to refer to the UK house price boom as a bubble? etc Very interested to replies to this one.

[Flat Bear]

Looking at the 3 house price corrections since ww2 and the 3 corresponding GDP falls into negative GDP (recession)

House prices measured in terms of multiples of average salaries.

House price crash 1

Main features high inflationary period, The biggest and quickest GDP fall, with the highest pre bust GDP.

1972 After very steep increase in GDP and house prices, GDP peaks and starts to fall at some speed. (it takes less tan 20 months for gdp to fall from over 6% to -.5%.)

2.5 to 3 months later house prices hit a peak and start a dramatic change of direction shadowing the sudden change in the direction of GDP.

End of 1973 negative GDP entered into recession begins for the first time since WW2.

Very early in 1974 GDP troughs at around -.5%

late 1974 GDP starts to rise

early 1975 recession is pulled out of.

late 1975 house prices hit their trough for the cycle

Early 1978 GDP hits a peak (and starts a long decline see house price crash 2)

early in 1979 house prices hit a peak (and starts a decline see house price crash 2)

House price crash 2

started from the lowest GDP level, deepest GDP falls and recession, smallest falls in house prices.

Early in 1978 GDP starts its decline

early in 1979 House prices start their decline

early 1980 recession entered into

late 1980 recessionary trough reached at aroud -1% deepest recession.

mid 1981 recession pulled out of

very late 1981 house prices trough and during

late 1988 GDP hits a peak (before suddenly starting to fall see house price crash 3)

early 1989 house prices hit a peak (before suddenly starting to fall see house price crash 3)

House price crash 3

longest period for recovery of GDP back above 2% level, longest and lowest house price crash.

late 1988 GDP suddenly starts to fall

early 1989 house price suddenly start to fall

very early 1990 recession entered yet again

late 1990 recession hits its trough before stating a slow recovery.

early 1994 GDP hits a peak before starting a long plateau the longest period of relatively high growth (above 2%)

early 1995 house prices hit their trough stagnating for the year before starting a very long, slow at first ascent

...................................???????????????

What happens next?

Some interesting points

the magnitude of each boom is important in predicting each bust as well as the extremes and speeds of change but length of each boom seems extremely important.

The current boom has gone on about as long if not longer than the previous 3 put together!

In theory the boom in GDP should have ended long before now and its "dragging out" seems to be distorting house prices as well

No matter how benign the next bust in the economy house prices will suffer a longer downturn, even if GDP doesnt enter negative territory a deep correction would look inevitable.

House prices are starting at a much higher level than ever before whilst GDP at around its average of around 2.2 to 2.8%? this makes the biggest gap ever between these 2 factors.

I will be trying to find more information about the likely trend for GDP in the UK as far into the future as possible. If we see GDP fall below the 2% with further declines in growth likely I would suggest a house price correction would be underway soon after, I dont believe there would be a long delay this time.

Edited July 1, 2007 by Flat Bear

[29929BlackTuesday]

But

even if we now know there is a definate correlation between gdp and house prices how does this help?

Is it easier to forecast a slowing in GDP or even a recession?

Is the GDP forecast going down for the next year or two?

For heaven's sake - it's DEFINITE ...defiNIte FINITE with a 'de' before it.

I'm sorry about that - I've got it out of my system.

Plus I think you're being a little bit naughty with you're posting - coming over all Warren Buffet and GDP / blah blah with the hidden intention to dispirit the FTBs reading for the first time.

PRICES FOR HOUSES ARE COMING DOWN AND WILL CONTINUE. DO NOT BUY A HOUSE NOW - YOU WILL LOSE A LOT OF MONEY.

WAIT...

spelling errer.

Edited July 1, 2007 by 29929BlackTuesday

[Flat Bear]

For heaven's sake - it's DEFINITE ...defiNIte FINITE with a 'de' before it.

I'm sorry about that - I've got it out of my system.

Plus I think you're being a little bit naughty with you're posting - coming over all Warren Buffet and GDP / blah blah with the hidden intention to dispirit the FTBs reading for the first time.

PRICES FOR HOUSES ARE COMING DOWN AND WILL CONTINUE. DO NOT BUY A HOUSE NOW - YOU WILL LOSE A LOT OF MONEY.

WAIT...

spelling errer.

Im unsure what you're getting at ,do you believe GDP changes has nothing to do with house prices? or are you a frustrated English teacher?

Edited July 1, 2007 by Flat Bear

[Sinking Feeling]

Money supply seems to be the primary factor in booms and busts, i.e. because assets are often either finite or their supply increases only slowly, an increase in money supply has an inflationary effect - what's often called a boom. When the supply of money later decreases, asset prices decrease also. As finance in most countries is secured against property, any drop in price in property means a drop in the amount of money that can be borrowed (or created).

The primary cause therefore of booms is the availability of easy credit, recessions are caused by that credit becoming harder to obtain as banks become more risk averse.

[Sinking Feeling]

This graph (below)shows the money supply and its falls fit the pattern quite well. The first recession over the last century came after WWI in the early 1920s. If you want to know how the financiers brought this about read the Financiers and the Nation:

http://www.archive.org/details/financiersandthe033017mbp

Especially the chapter about "Usury on the Great War" and the following Chapter, especially p64 for anyone thinking that credit crunches are something new.

Problems in the 1930s were generally imported via loans from the US, however, their money supply dropped dramatically during this period.

You can see a sharp rise in the early 70s, Barber Boom period, followed by a sharp drop- recession 1974ish. The same again in the early 80s (not so clear on this particular graph) and a massive drop from 1989 into the early 1990s.

And again a drop after 2000 into 2001.

You don't have to be the Governor of the BoE to guess what will happen next!

Broad_money.tiff

Broad_money.tiff

Edited July 1, 2007 by Sinking Feeling

[alabala]

Andrew Farlow

http://www.economics.ox.ac.uk/members/andrew.farlow/

The UK Economy, Housing, Banking

Housing, consumption, and the economy: Why do house prices become misaligned, and what are the consequences? Guest Lecture, The London Business School, 2 June 2005

Part One: UK House Prices: A Critical Assessment January 2004 version (updating of May 2003 version, prepared for Credit Suisse First Boston)

Part Two: Bubbles and Buyers January 2004 version (updating of May 2003 version, prepared for Credit Suisse First Boston)

Parts One and Two recommended by Martin Wolf in the Financial Times.

Part Three: UK House Prices, Consumption and GDP in a Global Context January 2005. Part Three recommended by Hamish McRae in the Independent on Sunday.

Presentation: UK House Prices, Consumption and GDP in a Global Context, Conference hosted by John D Wood & Co. London, 20 January 2005.

We found that much of the

argument these days centred on the notion that

nominal interest rate falls had unlocked credit

constraints in an unusually powerful way, and that

house prices had risen dramatically as a rational

response. But we found little support for this,

especially when the nature of credit constraints is

taken seriously. To the extent that a credit

constraints explanation worked, it reflected attention

back on to real income expectations. In turn these

income expectations turn out to be far too weak to

explain all the recent real growth in UK house

prices, and indicate more the risk of future house

price falls. If an explanation is to be found for recent

dramatic house price rises, it is not to be found in the

usual demand or supply fundamentals, but rather in

the behaviour of consumers and banks,

Part One concluded that fundamental factors were

incapable of explaining all of the recent surge in UK

house prices. Part Two has sort to explore the ways

in which buyers themselves may drive markets away

from fundamentals. Of course, it is not the complete

picture since they cannot do this without the

acquiescence of financial players, in particular the

large mortgage banks. Even if house buyers find it

extremely difficult to arbitrage long-lasting price

distortions, it is just possible that financial

institutions can. It turns out, however, that there is

arbitrage failure at the financial institutions level too.

There are also large uncertainties about

other asset prices too. House price and stock

markets have not tended to collapse together in

the past (in the US and UK). Given the

potentially greater synchronisation of global

housing markets, are the risks higher of a stock

market knock-on effect? Third, interest rates

may not be all that powerful at shielding

households from house price falls (just as they

do not seem to have been all that powerful at

stopping price rises167) if those falls are largely

reversals of price rises driven by speculative

forces.

The paradox for home owners is that if housing

and consumption are relatively uncorrelated, the

less confident they should be that central banks

will try to resist house price falls; yet the greater

the correlation, the greater the dangers to them

and to others of self-reinforcing price falls

anyway.

Reversion to fundamentals, while it harms consumption, at least conceivably puts the economy back on a footing that emphasizes real economic activity over speculative housing activity and ends the distortions that lead to long-term pension and saving misallocation.

Can anybody honestly say that this is going to be a soft Landing?

[Flat Bear]

Here is a graph of gdp covering the last crash.

gdp seems to start dropping slightly before the crash, but doesn't go negative until well after the crash.

It looks to me as though the massive increase in interest rates to curb inflation before either event causes the GDP to start dropping.

Then the housing market starts to tumble, then gdp goes negative.

Well, it looks like it was'nt different this time at all

[Flat Bear]

On 29/06/2007 at 22:52, libspero said:

Here is a graph of gdp covering the last crash.

gdp seems to start dropping slightly before the crash, but doesn't go negative until well after the crash.

It looks to me as though the massive increase in interest rates to curb inflation before either event causes the GDP to start dropping.

Then the housing market starts to tumble, then gdp goes negative.

This thread started in 2007 looked at the relationship between GDP and HPI

I believe we will see a global slowdown starting sometime this year. Although we are likely to have a better outcome than the Eurozone and US initially, we could see a prolonged depression to rival any previous downturns.

Would this mean we could see nominal house price falls of around 20% from 2023 to 2025? and possible real house price stagnation for a decade or more?

QE and ZIRP has kept asset price artificially high for over a decade. What happens when this goes into reverse?

Could we see a credit crunch or/and a currency collapse?