Reasons for a House Price Crash in a nutshell

[Mikhail Liebenstein]

So the trend will be flattish/downward for some time yet until the next "boom" which is not likely to be a boom as we have seen it but my definition of the next boom will be holding prices steady at 2-3% rises pa. Fact is that there are too many people who own their properties outright and are happy to stay where they are to prevent house prices crashing 40%. I believe that the next economic (alebit slow) boom will be under way in within 5 years time driven by maybe eco industries / or the return of offshore jobs as Indians, Chinese etc. start becoming expensive relative to us poor, devalued westerners.

I suspect the optimal buying time is just after a period of significant falls (at least 15% - 20%) after the next major "shock". After that it will be back to years of flat or steady activity. It is possible for the credit boom to return but that will take 20-30 years - enough time for older people to forget and for younger people to start making the same mistakes!

I suspect it will look a bit like this, why break with tradition.

Of course a standard loaf of bread will be £3 by then, and at some point wages will have risen to accommodate that £3 loaf. .

[Bruce Banner]

I suspect it will look a bit like this, why break with tradition.

Of course a standard loaf of bread will be £3 by then, and at some point wages will have risen to accommodate that £3 loaf. .

Ah yes, you bought a house last year, did you not?

What happened to the trend line, it's going the wrong way .

[Democorruptcy]

Other posters have probably made the same arguments, but here are the main reasons for a house price crash in a nutshell:

1. In many areas, it has now become cheaper to rent that to buy.

2. Other fundamental indicators point to an overvaluation of the market.

3. The supply of First time buyers is drying up.

4. The supply of BTL investors will soon dry up.

4. The housing market is entirely driven by credit.

1. Only because they compare rents with 2 year fixed mortgages with interest rates at a 300 year low

2. Previous fundamentals have gone out of the window switching from single to joint income mortgages

3. It should dry up but the government and councils are using our taxes to keep the bottom of the pyramid going. Newbuy and Firstbuy defer debt and move the lending risk onto us instead of banks.

4. BTL is going large scale, corporations mass buying with tax breaks in REITs.

4. It is driven by credit see 2, the FSA have not introduced any salary multiple or LTV rules, 5.5 times joint income mortgages are still going through.

[Bruce Banner]

1. Only because they compare rents with 2 year fixed mortgages with interest rates at a 300 year low

Did you notice the date of the post you quoted?

[crashmonitor]

Edit.

Edited June 9, 2012 by crashmonitor

[Bob Loblaw]

Did you notice the date of the post you quoted?

Exactly the point I was trying to make by resurecting this 8 year old post. The reasons trotted out here for an impending crash are exactly the same reasons trotted out eight years ago. Yet life ticks on.

As to your claim to be £100,000 better off by selling in 2005 and renting, would be interested to know if the calculation includes the reduction of capital owed on the property (7 years mortgage payments not made as now renting)

[Bruce Banner]

Exactly the point I was trying to make by resurecting this 8 year old post. The reasons trotted out here for an impending crash are exactly the same reasons trotted out eight years ago. Yet life ticks on.

As to your claim to be £100,000 better off by selling in 2005 and renting, would be interested to know if the calculation includes the reduction of capital owed on the property (7 years mortgage payments not made as now renting)

Yes, it was quite obvious why you resurrected the thread.

My (rough) calculation is a comparison between renting and buying the house I'm renting. Had I bought the house seven years ago, it would have cost me £400K. If I were to buy it today, it would be £350K, so there's a £50K saving. The £400K I would have had tied up in the house has earned about £125K compound interest (average 4% p.a.) over the last seven years and I made about £60K on GBP/EUR exchange rate as I had half of it in EUR until recently as we were thinking of buying a house in France. Less £77K paid out in rent.

£50K + £125K + £60K = £235K - £77K = £158K better off as a direct result of renting over the last seven years. Less a bit of tax, so about £140K net in pocket.

[eric pebble]

Yes, it was quite obvious why you resurrected the thread.

My (rough) calculation is a comparison between renting and buying the house I'm renting. Had I bought the house seven years ago, it would have cost me £400K. If I were to buy it today, it would be £350K, so there's a £50K saving. The £400K I would have had tied up in the house has earned about £125K compound interest (average 4% p.a.) over the last seven years and I made about £60K on GBP/EUR exchange rate as I had half of it in EUR until recently as we were thinking of buying a house in France. Less £77K paid out in rent.

£50K + £125K + £60K = £235K - £77K = £158K better off as a direct result of renting over the last seven years. Less a bit of tax, so about £140K net in pocket.

Excellent stuff Bruce; I take my hat off to you -- bloody well done mate.

[Gigantic Purple Slug]

Yes, it was quite obvious why you resurrected the thread.

My (rough) calculation is a comparison between renting and buying the house I'm renting. Had I bought the house seven years ago, it would have cost me £400K. If I were to buy it today, it would be £350K, so there's a £50K saving. The £400K I would have had tied up in the house has earned about £125K compound interest (average 4% p.a.) over the last seven years and I made about £60K on GBP/EUR exchange rate as I had half of it in EUR until recently as we were thinking of buying a house in France. Less £77K paid out in rent.

£50K + £125K + £60K = £235K - £77K = £158K better off as a direct result of renting over the last seven years. Less a bit of tax, so about £140K net in pocket.

You didn't factor in how much it would have cost you in maintenance over the 7 years.

[Bruce Banner]

Excellent stuff Bruce; I take my hat off to you -- bloody well done mate.

Thank's Eric, but it wasn't rocket science, just risk averse investment and a little bit of luck with the EUR .

It was obvious to me that we, as a nation, couldn't continue to earn a living by selling our houses to each other for ever increasing amounts.

By the was, I mentioned "Liar Loans", in conversation with my bank manager a year or two back. He did a double take, then burst out laughing, "Liar loans, that's exactly what they are", he said.

[Bruce Banner]

You didn't factor in how much it would have cost you in maintenance over the 7 years.

No, I left that in hand in case some joker got argumentative , so you could add £10 or 20K, perhaps more, to the £140K.

[bmf]

Excellent stuff Bruce; I take my hat off to you -- bloody well done mate.

Bruce's situation is not the same as 95% of buyers. He has the cash up front. Those who do not cannot calculate the opportunity cost of not investing money they do not have.

This calculation is useful if you have 400K in the bank. If you do not then the variables input into this equation are different.

[Bruce Banner]

Bruce's situation is not the same as 95% of buyers. He has the cash up front. Those who do not cannot calculate the opportunity cost of not investing money they do not have.

This calculation is useful if you have 400K in the bank. If you do not then the variables input into this equation are different.

I mentioned it because there are numerous VI posts, on these forums, urging potential cash buyers to "buy now before your cash is eaten up by inflation".

[bmf]

I mentioned it because there are numerous VI posts, on these forums, urging potential cash buyers to "buy now before your cash is eaten up by inflation".

Yep, no problem with that Bruce. I'm not disputing the figures and for cash buyers IMHO it's sound advice.

[winkie]

The only difference between then and now is this BoE interest rate 4.75%.....if that had not been reduced to 0.5% things would have been very different.....how low can they go?

[cojak]

Other posters have probably made the same arguments, but here are the main reasons for a house price crash in a nutshell:

Werent all these things true in 2004? Are you trying to convince yourself or others?

[Hat]

Werent all these things true in 2004? Are you trying to convince yourself or others?

Excellent point. All these things are still true. Further proof, as if it were needed, that the bulk of the crash in the UK is still to come.

FYI, real house prices in Q1 2004 were £181k and now stand at £163k (Nationwide). That means any financial genius who has paid cash in the last eight years for the average house has made a real capital loss of at least 10% and missed out on large gains in alternative assets. Let's call these people morons.

For those who bought with 100% mortgages from Q1 2004 onwards, well, the nominal value of the average property has risen at best by £24k from about £139k to £163k in that time. Even making the massive assumption that their interest costs plus repair costs plus buying costs equal the rent they have saved, they are still at best in the position of having approximately a 15% buffer between themselves and negative equity and at worst are already in around 10% of negative equity (since the peak of £184k in 2007). That is all the while sitting right near the top of the approaching property price precipice and having paid down no debt. Let's call these people cretins.

Of course most people who purchased in the last eight years will have financed their transaction somewhere between these two extremes. Such people may have to do their own calculations to decide whereabouts they sit on the scale from moron to cretin.

The clock is ticking Cojak...If all the factors that were true in 2004 are still true now, all you have to ask yourself is "how far back will this net reach when the crash is all done?"

[wheresitgoing]

I suspect it will look a bit like this, why break with tradition.

Of course a standard loaf of bread will be £3 by then, and at some point wages will have risen to accommodate that £3 loaf. .

Good stuff - thats the kind of graph I sketched out.

So maybe another 3-4 year wait till we hit bottom.

[Mikhail Liebenstein]

Good stuff - thats the kind of graph I sketched out.

So maybe another 3-4 year wait till we hit bottom.

Indeed, why should history not repeat itself. I am just calling inflation, but a lot on the board don't seem to like it as if I am supporting higher house prices. After the inflation real prices will definitely be lower, but nominal price could simultaneously be higher.

We used to have good debates about this on the board a while back, but we seem to have reverted to a group mainly expecting house prices to fall to 1p so that they can buy them with spare change.

[200p]

I suspect it will look a bit like this, why break with tradition.

Of course a standard loaf of bread will be £3 by then, and at some point wages will have risen to accommodate that £3 loaf. .

I am in broad agreement;

Plug in more recent numbers

Previous peak date = 2007

1995 bottom to 2007 peak = 12 years

12 x 2.166 = 26 years

2007 + 26 years = The year 2033

2033 is when we can see the 2007 all time highs be exceeded. Wow we'll need some serious currency devaluation, and pain. I hope I'm wrong!

If we assume a symmetrical curve and take 13 years as the halfway point, the bottom will be 2007 + 13 = The year 2020

If one is bearish on house prices, they must be similarly be a bull on sterling.

Edited June 10, 2012 by MrTReturns

[Mikhail Liebenstein]

I am in broad agreement;

Plug in more recent numbers

Previous peak date = 2007

1995 bottom to 2007 peak = 12 years

12 x 2.166 = 26 years

2007 + 26 years = The year 2033

2033 is when we can see the 2007 all time highs be exceeded. Wow we'll need some serious currency devaluation, and pain. I hope I'm wrong!

If we assume a symmetrical curve and take 13 years as the halfway point, the bottom will be 2007 + 13 = The year 2020

If one is bearish on house prices, they must be similarly be a bull on sterling.

I don't disagree with your thoughts here. In one sense people are living longer, and perhaps the economic cycles have been stretched in their duration. That said, I don't necessarily think when prices run up in the future they will do so over a much greater period of time as normally housing booms accelerate as they go, and a longer boom would imply even greater overpricing. But I could see a fast and higher run ups, followed by periods of prolonged real falls.

[Hat]

Indeed, why should history not repeat itself. I am just calling inflation, but a lot on the board don't seem to like it as if I am supporting higher house prices. After the inflation real prices will definitely be lower, but nominal price could simultaneously be higher.

We used to have good debates about this on the board a while back, but we seem to have reverted to a group mainly expecting house prices to fall to 1p so that they can buy them with spare change.

Sorry Michael, but there are going to be large nominal falls.

The principle mistake running through a lot of the posts on this site is that somehow this is a re-run of the previous two declines in UK real house prices which took place in the last forty years or some variation of their factors and attributes. This is mostly some sort of personal-experience-led bias brought about by the age of the posters and that infallible UK belief that we are all experts in the property market.

The main basic factual misunderstandings creating this misperception are:

(1) That the UK will experience inflation going forward.

(2) That real house prices mean revert around an upward trend.

(There are two other common misperceptions on this site that also lead to bullish views such as yours about nominal house prices in the UK going forward. Firstly, that the Austrian school of economics is a good model for explaining the present. It isn't. What occurred in the UK was an asset price bubble plain and simple. Yes, you could apply Austrian style logic to sectors that took a large part in the bubble and then suffered badly when the bubble popped (ie construction/banking), but by and large if you look at the headline companies going bust, all the credit contraction did was bring forward the day of reckoning for failed business models. That is most of the models were proved lacking by not adapting to out of town retailing and the internet etc Others were mainly victims of excessive debt loading. By and large though, there weren't massive misallocations of capital amongst businesses. In fact on the contrary, lots of UK businesses are awash with cash. This is also a common feature of Japanese companies. Secondly, that the BOE is funding government expenditure via QE and that this will be highly inflationary. This is complete poppycock. The BOE is buying its gilts in the secondary market ie off of other holders. Would there be a market without the BOE? You bet. If Gilts were yielding 10%, I expect people would be rushing into the market. Yes, the BOE is surpressing the yield, but government borrowing would still be funded by the market in their absence.)

OK, let's look at (1) first:

The deflationary forces over the last 10-15 years have been enormous. So big, that the UK had the largest credit expansion in its history and we hardly got any inflation. In fact the BOE's biggest concern, rightly was deflation and still is. Look at the graph of UK inflation:

UK Inflation

See how quickly the UK went into RPI deflation as the crunch hit? That is our future. Why? The principle reason is that inflation has been stoked by commodity speculation based on unfounded inflation fears. Witness the bubble in gold. As inflation falls over the coming year, it will start to become obvious; even more so as real rates turn positive. This particular switch will happen quite quickly. Many interest bearing accounts are now offering rates over 3% just as inflation is heading below that figure. The smart money has already dumped gold. As other speculators realise that default and bank recapitalisation will trump monetization and that far from a paper collapse we get the opposite, a lot of people will get badly burned.

If you are still unconvinced about inflation, then the key is to look at M4 which will continue to contract or at best stabilise because of BOE efforts. Money supply will not be rising for a long long time and as we know, inflation is always and everywhere a monetary phenomenon.

If you are in any doubt about the anomalous nature of the last 40 years wrt to inflation, look at a long term graph: UK Inflation

(2) This misperception mainly results from eyeballing graphs such as the Nationwide's shown on the front page of this website. Never forget that Nationwide is a lender. It has a massive interest in distorting the true picture. The red line is a line of best fit to real house prices over an unrepresentative period of UK house prices.

Historical analysis in the UK and in other markets all over the world shows that over time the real percentage increase in real house prices is zero.

The red line on the Nationwide graph should be horizontal. (Also incorrect is the idea there will be mean reversion to an income multiple of 3-3.5 times earnings. The long term average is nearer 2.5.) If you doubt this, try the book "Safe as Houses?" or go straight to the source data.

If you download the Nationwide data for the 35-40 year period in question, and look at the real house price column in the spreadsheet, you can even today see that real prices in 1975 were the same as in the mid-90s. That is where they are going again. That is real prices in the UK are going to halve.

The only real question is timescale. The closest template is Japan: Japanese House Prices. Here you can see the mean reversion to a zero real return over time that we will experience in the UK. We'll see baby boomers selling up and then trading down to a place not quite as good as they expected; Mortgage debt growing in real terms and lingering; Defaults at a steady pace accompanied by bank recapitilisations.

There is a thread on this site I sometimes see comparing this crash to the 90s. It is completely invalid and depressing. The charts make it look like were nearly done and people become despondent. The 90s crash was a small correction in a forty year bull market that is now coming to an end. Inflation will not be eroding the debt; real wages will not be rising. The 50% real house price fall to come will be largely nominal.

[TheCountOfNowhere]

Sorry Michael, but there are going to be large nominal falls.

The principle mistake running through a lot of the posts on this site is that somehow this is a re-run of the previous two declines in UK real house prices which took place in the last forty years or some variation of their factors and attributes. This is mostly some sort of personal-experience-led bias brought about by the age of the posters and that infallible UK belief that we are all experts in the property market.

The main basic factual misunderstandings creating this misperception are:

(1) That the UK will experience inflation going forward.

(2) That real house prices mean revert around an upward trend.

(There are two other common misperceptions on this site that also lead to bullish views such as yours about nominal house prices in the UK going forward. Firstly, that the Austrian school of economics is a good model for explaining the present. It isn't. What occurred in the UK was an asset price bubble plain and simple. Yes, you could apply Austrian style logic to sectors that took a large part in the bubble and then suffered badly when the bubble popped (ie construction/banking), but by and large if you look at the headline companies going bust, all the credit contraction did was bring forward the day of reckoning for failed business models. That is most of the models were proved lacking by not adapting to out of town retailing and the internet etc Others were mainly victims of excessive debt loading. By and large though, there weren't massive misallocations of capital amongst businesses. In fact on the contrary, lots of UK businesses are awash with cash. This is also a common feature of Japanese companies. Secondly, that the BOE is funding government expenditure via QE and that this will be highly inflationary. This is complete poppycock. The BOE is buying its gilts in the secondary market ie off of other holders. Would there be a market without the BOE? You bet. If Gilts were yielding 10%, I expect people would be rushing into the market. Yes, the BOE is surpressing the yield, but government borrowing would still be funded by the market in their absence.)

OK, let's look at (1) first:

The deflationary forces over the last 10-15 years have been enormous. So big, that the UK had the largest credit expansion in its history and we hardly got any inflation. In fact the BOE's biggest concern, rightly was deflation and still is. Look at the graph of UK inflation:

UK Inflation

See how quickly the UK went into RPI deflation as the crunch hit? That is our future. Why? The principle reason is that inflation has been stoked by commodity speculation based on unfounded inflation fears. Witness the bubble in gold. As inflation falls over the coming year, it will start to become obvious; even more so as real rates turn positive. This particular switch will happen quite quickly. Many interest bearing accounts are now offering rates over 3% just as inflation is heading below that figure. The smart money has already dumped gold. As other speculators realise that default and bank recapitalisation will trump monetization and that far from a paper collapse we get the opposite, a lot of people will get badly burned.

If you are still unconvinced about inflation, then the key is to look at M4 which will continue to contract or at best stabilise because of BOE efforts. Money supply will not be rising for a long long time and as we know, inflation is always and everywhere a monetary phenomenon.

If you are in any doubt about the anomalous nature of the last 40 years wrt to inflation, look at a long term graph: UK Inflation

(2) This misperception mainly results from eyeballing graphs such as the Nationwide's shown on the front page of this website. Never forget that Nationwide is a lender. It has a massive interest in distorting the true picture. The red line is a line of best fit to real house prices over an unrepresentative period of UK house prices.

Historical analysis in the UK and in other markets all over the world shows that over time the real percentage increase in real house prices is zero.

The red line on the Nationwide graph should be horizontal. (Also incorrect is the idea there will be mean reversion to an income multiple of 3-3.5 times earnings. The long term average is nearer 2.5.) If you doubt this, try the book "Safe as Houses?" or go straight to the source data.

If you download the Nationwide data for the 35-40 year period in question, and look at the real house price column in the spreadsheet, you can even today see that real prices in 1975 were the same as in the mid-90s. That is where they are going again. That is real prices in the UK are going to halve.

The only real question is timescale. The closest template is Japan: Japanese House Prices. Here you can see the mean reversion to a zero real return over time that we will experience in the UK. We'll see baby boomers selling up and then trading down to a place not quite as good as they expected; Mortgage debt growing in real terms and lingering; Defaults at a steady pace accompanied by bank recapitilisations.

There is a thread on this site I sometimes see comparing this crash to the 90s. It is completely invalid and depressing. The charts make it look like were nearly done and people become despondent. The 90s crash was a small correction in a forty year bull market that is now coming to an end. Inflation will not be eroding the debt; real wages will not be rising. The 50% real house price fall to come will be largely nominal.

Good analysis. Well done. If you want to fit in here though you might want to do more angry rants and less reasoned arguments

The likeness to Japan 20 years ago is quite startling but we differ from them in several important ways. Most importantly, 1) They are a selfless hard working society where family is important and everyone will do their duty. 2) They are ( or were ) an economic power house.

The UK couldn't be any more different from Japan if it tried, this is why the UK will not see the same thing that happened to Japan play out here.

[19 year mortgage 8itch]

Sorry Michael, but there are going to be large nominal falls.

The principle mistake running through a lot of the posts on this site is that somehow this is a re-run of the previous two declines in UK real house prices which took place in the last forty years or some variation of their factors and attributes. This is mostly some sort of personal-experience-led bias brought about by the age of the posters and that infallible UK belief that we are all experts in the property market.

The main basic factual misunderstandings creating this misperception are:

(1) That the UK will experience inflation going forward.

(2) That real house prices mean revert around an upward trend.

(There are two other common misperceptions on this site that also lead to bullish views such as yours about nominal house prices in the UK going forward. Firstly, that the Austrian school of economics is a good model for explaining the present. It isn't. What occurred in the UK was an asset price bubble plain and simple. Yes, you could apply Austrian style logic to sectors that took a large part in the bubble and then suffered badly when the bubble popped (ie construction/banking), but by and large if you look at the headline companies going bust, all the credit contraction did was bring forward the day of reckoning for failed business models. That is most of the models were proved lacking by not adapting to out of town retailing and the internet etc Others were mainly victims of excessive debt loading. By and large though, there weren't massive misallocations of capital amongst businesses. In fact on the contrary, lots of UK businesses are awash with cash. This is also a common feature of Japanese companies. Secondly, that the BOE is funding government expenditure via QE and that this will be highly inflationary. This is complete poppycock. The BOE is buying its gilts in the secondary market ie off of other holders. Would there be a market without the BOE? You bet. If Gilts were yielding 10%, I expect people would be rushing into the market. Yes, the BOE is surpressing the yield, but government borrowing would still be funded by the market in their absence.)

OK, let's look at (1) first:

The deflationary forces over the last 10-15 years have been enormous. So big, that the UK had the largest credit expansion in its history and we hardly got any inflation. In fact the BOE's biggest concern, rightly was deflation and still is. Look at the graph of UK inflation:

UK Inflation

See how quickly the UK went into RPI deflation as the crunch hit? That is our future. Why? The principle reason is that inflation has been stoked by commodity speculation based on unfounded inflation fears. Witness the bubble in gold. As inflation falls over the coming year, it will start to become obvious; even more so as real rates turn positive. This particular switch will happen quite quickly. Many interest bearing accounts are now offering rates over 3% just as inflation is heading below that figure. The smart money has already dumped gold. As other speculators realise that default and bank recapitalisation will trump monetization and that far from a paper collapse we get the opposite, a lot of people will get badly burned.

If you are still unconvinced about inflation, then the key is to look at M4 which will continue to contract or at best stabilise because of BOE efforts. Money supply will not be rising for a long long time and as we know, inflation is always and everywhere a monetary phenomenon.

If you are in any doubt about the anomalous nature of the last 40 years wrt to inflation, look at a long term graph: UK Inflation

(2) This misperception mainly results from eyeballing graphs such as the Nationwide's shown on the front page of this website. Never forget that Nationwide is a lender. It has a massive interest in distorting the true picture. The red line is a line of best fit to real house prices over an unrepresentative period of UK house prices.

Historical analysis in the UK and in other markets all over the world shows that over time the real percentage increase in real house prices is zero.

The red line on the Nationwide graph should be horizontal. (Also incorrect is the idea there will be mean reversion to an income multiple of 3-3.5 times earnings. The long term average is nearer 2.5.) If you doubt this, try the book "Safe as Houses?" or go straight to the source data.

If you download the Nationwide data for the 35-40 year period in question, and look at the real house price column in the spreadsheet, you can even today see that real prices in 1975 were the same as in the mid-90s. That is where they are going again. That is real prices in the UK are going to halve.

The only real question is timescale. The closest template is Japan: Japanese House Prices. Here you can see the mean reversion to a zero real return over time that we will experience in the UK. We'll see baby boomers selling up and then trading down to a place not quite as good as they expected; Mortgage debt growing in real terms and lingering; Defaults at a steady pace accompanied by bank recapitilisations.

There is a thread on this site I sometimes see comparing this crash to the 90s. It is completely invalid and depressing. The charts make it look like were nearly done and people become despondent. The 90s crash was a small correction in a forty year bull market that is now coming to an end. Inflation will not be eroding the debt; real wages will not be rising. The 50% real house price fall to come will be largely nominal.

[ska_mna]

Sorry Michael, but there are going to be large nominal falls.

The principle mistake running through a lot of the posts on this site is that somehow this is a re-run of the previous two declines in UK real house prices which took place in the last forty years or some variation of their factors and attributes. This is mostly some sort of personal-experience-led bias brought about by the age of the posters and that infallible UK belief that we are all experts in the property market.

The main basic factual misunderstandings creating this misperception are:

(1) That the UK will experience inflation going forward.

(2) That real house prices mean revert around an upward trend.

(There are two other common misperceptions on this site that also lead to bullish views such as yours about nominal house prices in the UK going forward. Firstly, that the Austrian school of economics is a good model for explaining the present. It isn't. What occurred in the UK was an asset price bubble plain and simple. Yes, you could apply Austrian style logic to sectors that took a large part in the bubble and then suffered badly when the bubble popped (ie construction/banking), but by and large if you look at the headline companies going bust, all the credit contraction did was bring forward the day of reckoning for failed business models. That is most of the models were proved lacking by not adapting to out of town retailing and the internet etc Others were mainly victims of excessive debt loading. By and large though, there weren't massive misallocations of capital amongst businesses. In fact on the contrary, lots of UK businesses are awash with cash. This is also a common feature of Japanese companies. Secondly, that the BOE is funding government expenditure via QE and that this will be highly inflationary. This is complete poppycock. The BOE is buying its gilts in the secondary market ie off of other holders. Would there be a market without the BOE? You bet. If Gilts were yielding 10%, I expect people would be rushing into the market. Yes, the BOE is surpressing the yield, but government borrowing would still be funded by the market in their absence.)

OK, let's look at (1) first:

The deflationary forces over the last 10-15 years have been enormous. So big, that the UK had the largest credit expansion in its history and we hardly got any inflation. In fact the BOE's biggest concern, rightly was deflation and still is. Look at the graph of UK inflation:

UK Inflation

See how quickly the UK went into RPI deflation as the crunch hit? That is our future. Why? The principle reason is that inflation has been stoked by commodity speculation based on unfounded inflation fears. Witness the bubble in gold. As inflation falls over the coming year, it will start to become obvious; even more so as real rates turn positive. This particular switch will happen quite quickly. Many interest bearing accounts are now offering rates over 3% just as inflation is heading below that figure. The smart money has already dumped gold. As other speculators realise that default and bank recapitalisation will trump monetization and that far from a paper collapse we get the opposite, a lot of people will get badly burned.

If you are still unconvinced about inflation, then the key is to look at M4 which will continue to contract or at best stabilise because of BOE efforts. Money supply will not be rising for a long long time and as we know, inflation is always and everywhere a monetary phenomenon.

If you are in any doubt about the anomalous nature of the last 40 years wrt to inflation, look at a long term graph: UK Inflation

(2) This misperception mainly results from eyeballing graphs such as the Nationwide's shown on the front page of this website. Never forget that Nationwide is a lender. It has a massive interest in distorting the true picture. The red line is a line of best fit to real house prices over an unrepresentative period of UK house prices.

Historical analysis in the UK and in other markets all over the world shows that over time the real percentage increase in real house prices is zero.

The red line on the Nationwide graph should be horizontal. (Also incorrect is the idea there will be mean reversion to an income multiple of 3-3.5 times earnings. The long term average is nearer 2.5.) If you doubt this, try the book "Safe as Houses?" or go straight to the source data.

If you download the Nationwide data for the 35-40 year period in question, and look at the real house price column in the spreadsheet, you can even today see that real prices in 1975 were the same as in the mid-90s. That is where they are going again. That is real prices in the UK are going to halve.

The only real question is timescale. The closest template is Japan: Japanese House Prices. Here you can see the mean reversion to a zero real return over time that we will experience in the UK. We'll see baby boomers selling up and then trading down to a place not quite as good as they expected; Mortgage debt growing in real terms and lingering; Defaults at a steady pace accompanied by bank recapitilisations.

There is a thread on this site I sometimes see comparing this crash to the 90s. It is completely invalid and depressing. The charts make it look like were nearly done and people become despondent. The 90s crash was a small correction in a forty year bull market that is now coming to an end. Inflation will not be eroding the debt; real wages will not be rising. The 50% real house price fall to come will be largely nominal.

Nice post.

Re. money supply, I tried to illustrate the point that the rate of growth has slowed, drawing us away from the exponential in this post.

I'll post the chart again...

There's your depression, right there ^