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A.steve

Nominal Or Real House Price

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nominal fall in price is when inflation erodes the value, a real fall is when the actual price in pounds falls.

Hmmm... I'm even more confused now.

So, if one were to state a nominal and real average house price, how would the two be calculated?

Are we talking about RPI; RPIX; CPI or wage inflation here?

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Hmmm... I'm even more confused now.

So, if one were to state a nominal and real average house price, how would the two be calculated?

Are we talking about RPI; RPIX; CPI or wage inflation here?

Today, they are the same. If prices stay the same for a year but inflation is 10%, then the real price stays the same but the nominal price drops due to the effect of inflation.

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Today, they are the same. If prices stay the same for a year but inflation is 10%, then the real price stays the same but the nominal price drops due to the effect of inflation.

OK (I admitted it was a dumb question) but, you've not mentioned, which inflation is it? I'm particularly interested in the Nationwide's index...

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OK (I admitted it was a dumb question) but, you've not mentioned, which inflation is it? I'm particularly interested in the Nationwide's index...

I don't know which they use, but I would guess RPI would be most appropriate as it is considered a better inflation measure than CPI.

p.s. I put nominal and real the wrong way around deliberately hoping that someone would jump in to correct me (for a laugh...) As nobody has interjected I feel duty bound to inform you that they are the wrong way round in my previous posts.

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I don't know which they use, but I would guess RPI would be most appropriate as it is considered a better inflation measure than CPI.

p.s. I put nominal and real the wrong way around deliberately hoping that someone would jump in to correct me (for a laugh...) As nobody has interjected I feel duty bound to inform you that they are the wrong way round in my previous posts.

:-) Curiously, I made the inverse error when reading your reply - so I thought it made sense.

RPI would be a curious measure to use - since it includes mortgage payments, doesn't it?

Hmmm... I wonder what effect that would have in the context of trend analysis?

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What's confusing is that a real fall sounds worse than a nominal fall, but it isn't. Compare

"There's been a nominal fall in my house price"

with

"There's been a real fall in my house price"

And guess which one the sheeple will think is worse.

Maybe we could use this to lull the sheeple into a false sense of security. Perhaps get the press to report all price decreases as being only nominal falls.

Then there won't be so much bleating until it's too late...

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nominal fall in price is when inflation erodes the value, a real fall is when the actual price in pounds falls.

Other way round

(edit: ok! only saw your first post and the one prior to mine - no apparent wheeze going on until you read all the posts)

Edited by cynic

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The distinction is particularly important at the moment - the central reason why the experience of the last few generations has been of rising house prices is inflation, or the devaluation of money. This has led people to belive that property is someohw a magical asset class which always goes up in value over the long term (and therefore any price paid for it is justified). The confusion between real and nominal price change as a result of inflation is known as "money illusion" and is what has caused this bubble. Past falls in prices have been greatly moderated by inflation at the time - for example, the nominal fall between 1989 and 1995 was 19%, but the real fall was nearly 40%. However, the big difference is that we now have the MPC which has a single remit: keep inflation low, which means that nominal price falls will be more or less the same as real price falls.

Actually, it is not quite inflation that has been the driver of prices over the long term, but wage inflation. The attached graph shows house prices adjusted for average earnings. As you can see, up until 2002 they have mean-reverted* within a relatively narrow band. What it shows is that since 2002, we are in the biggest bubble (by far) since the second world war.

(*For the guy who kept angry in another thread that I used this phrase: Look up the meaning somewhere, I'm not going to bother arguing with you again on this)

UK_HPI_v_Av_Earnings.jpg

post-10259-1192175339_thumb.jpg

Edited by Extradry Martini

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..the nominal fall between 1989 and 1995 was 19%, but the real fall was nearly 40%.

Other way round*?

(I'm sure if I say this often enough, I'll be right one day! ......does that ring any bells?)

(*edit: only joking!).

Edited by cynic

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nominal fall in price is when inflation erodes the value, a real fall is when the actual price in pounds falls.

Other way around old chap. Anyway the one we realy want it the nominal price drop, ie the sticker price, this gives your savings an opportunity to close the price gap, often in previous crashes, inflation has has moved wages up while asking prices have remained static, this of course is good for borrowers but gives you no advantage re your savings which unfortunalty errode in value. (this of course is the one favoured by governemnt and those with lots of borrowings)

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Are we talking about RPI; RPIX; CPI or wage inflation here?

Wage inflation (the earnings multiple) is the most widely used measure. This is why reports refer to average houses being "6x average earnings".

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The distinction is particularly important at the moment - the central reason why the experience of the last few generations has been of rising house prices is inflation, or the devaluation of money. This has led people to belive that property is someohw a magical asset class which always goes up in value over the long term (and therefore any price paid for it is justified). The confusion between real and nominal price change as a result of inflation is known as "money illusion" and is what has caused this bubble. Past falls in prices have been greatly moderated by inflation at the time - for example, the nominal fall between 1989 and 1995 was 19%, but the real fall was nearly 40%. However, the big difference is that we now have the MPC which has a single remit: keep inflation low, which means that nominal price falls will be more or less the same as real price falls.

Actually, it is not quite inflation that has been the driver of prices over the long term, but wage inflation. The attached graph shows house prices adjusted for average earnings. As you can see, up until 2002 they have mean-reverted* within a relatively narrow band. What it shows is that since 2002, we are in the biggest bubble (by far) since the second world war.

(*For the guy who kept angry in another thread that I used this phrase: Look up the meaning somewhere, I'm not going to bother arguing with you again on this)

High quality post, EDM.

What are the implications for those borrowers with interest-only mortgages?

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High quality post, EDM.

What are the implications for those borrowers with interest-only mortgages?

Thanks for the kind for words. The difference between repaying the principal earlier or later is in relative real returns - if you can get a better real return from investing in another asset than you can by reducing the real interest you pay on your mortgage (i.e. via a repayment mortgage), you are better off with an interest-only mortgage. If not, you should have a repayment mortgage. Is this what you meant?

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