"long Term Real House Price Trend" Graph

[VeryMeanReversion]

The Nationwide "Long Term Real House Price Trend" always looks odd to me (as used on HPC home page and Nationwide reports). It was one data set that made me think wonder if there is only 20% downside likely and a few years of price stagnation can mop that up, hardly worth worring about.

However, there are a few things that are increasingly suspicious:

(1) The real trend is now claimed to be 2.8% pa.

Now why the trend for a given house should be above 0% surprises me. Extension/improvements can add value to the average house giving a +ve real trend, but the Amsterdam study has shown 0% is the long-term rate for well maintained but basically unmodified houses. Schiller showed similar results for the US market.

A trend of 2.8%, is a real doubling every 25 years. That doesn't pass a common sense test.

(2) The trend line starts at the low-point in 1978 and goes through the middle of the latest upswing, which we all know is the biggest UK housing boom in history.

This artificially lifts the apparent real-term trend, making the size of potential drops look less serious to the casual observer. I've had comments from a colleague that recently bought a new-build that looked at the graph saying "The worst that can happen is a 20% fall and we've secured a 20% discount of the builder"

(3) The 1990 peak coincides with the highest % of FTB's in the population (source: Paul Wallace Agequake book).

Lots of Miras-hopefuls in that age-group at the time, stimulated by easy credit and buy-before-its-too-late thinking.

The 2007 peak coincides with the highest % of 35-45 yr old in the population i.e. the age group with the biggest house-purchasing power (source: Paul Wallace Agequake book again)

=> If anything, the existence of any upward trend in real prices was just demographics, supported by easy credit and

momentum.

These age group %'s are now in steep decline for the next few decades anyway.

If you actually plot a trend line through the troughs, the next one should be at £80K in around 2012. (60% real-term drops, 15% per year)

The sheeple-voice in me says, "Dont be ridiculous, house prices will never get that low in real terms" but the analyst in me says it's just recent events that have been ridiculous.

I think the trend for an average house is probably nearer 1% a year at best, say improvements of say 20% of original value, made over 20 years.

For unmodified houses (a more accurate measure of housing asset price changes), I'd expect significant less.

VMR.

[Furby]

Good analysis VMR.

I have thought for a while that this bubble will be either the last ever or the last for a very long time. The unique variables that have contributed to it - Demographics, No risk to bank and liar loans - are probably all going to be irreplicable in the future.

Certainly demographics is a given - unless of course there is mass immigration. One of the aftermaths for the banks this time will be a more realisitc view of risk and when the extent of liar loan ville becomes mainstream i think we will see tighter regulation.

F

[pepsi]

...

The 2007 peak coincides with the highest % of 35-45 yr old in the population i.e. the age group with the biggest house-purchasing power (source: Paul Wallace Agequake book again)

=> If anything, the existence of any upward trend in real prices was just demographics, supported by easy credit and

momentum.

These age group %'s are now in steep decline for the next few decades anyway.

...

I think it is also important to consider the increasing age for first time home-buyers and also the effect of the student loan. I'm in my early 50's and bought my first property when I was 23, in Greater London at 3 + 1 times income. Things have changed! When you factor in student loans and the increased pension payments required to support an aging population I'm not sure how much money is going to be available to support a housing market.

[frozen_out]

There is one major flaw with that graph. Price should be on a log axis.

[Dosser]

"A trend is a trend is a trend, But the question is, will it bend?

Will it alter its course through some unforeseen force

And come to a premature end…?"

-- Sir Alec Cairncross

At what point in the trend, we are at, is debatable. I don't know if we have followed an increasing upswing trend to be followed by an increasing downswing - the graph on the homepage makes it look as though the three peaks have become more and more extreme. Alternatively this bubble could be so bloated, it is a deviation from the trend. Regardless, there was no way over the last couple of years I was buying at prices over the LT trend line.

D

[camem']

This artificially lifts the apparent real-term trend, making the size of potential drops look less serious to the casual observer. I've had comments from a colleague that recently bought a new-build that looked at the graph saying "The worst that can happen is a 20% fall and we've secured a 20% discount of the builder"

You want to look at this graph, which corrects for long term house price inflation (which turns out to be 5.9%). The 5.9% is chosen in order to do just that, but reassuringly both the peaks and troughs line up which suggests it is somewhere near right. Tells you when to expect the crash to be over, too

[microbe]

I have posted this data from 1930 - 2006 before, and I have not updated for the 2007 annual price. I don't think it makes much difference to the pattern though. Might be interesting to mix in population and earnings data.

Price figures are from CLG, to which I have added the RPI data to generate the adjusted prices.

[ElPapasito]

I have posted this data from 1930 - 2006 before, and I have not updated for the 2007 annual price. I don't think it makes much difference to the pattern though. Might be interesting to mix in population and earnings data.

Price figures are from CLG, to which I have added the RPI data to generate the adjusted prices.

So it looks like a clear 50% drop to get to trend?

[bobthe~]

Is it possible that a lesson will be learnt in this crash.

It wasn't in the last one. The last one was seen as a small blip on a long term ever upward trend.

So, the banks have to re-capitalise, but what about households?

If credit becomes less available, will it mean a change in attitudes towards saving and investing?

Not only record consumer debt, but aren't savings at an all time low?

This is the kind of thing that might put back the recovery (high household savings at low levels will also push people over the edge to repo land a lot quicker as well, so that should speed up the crash) or alternatively might allow the recovery to come back faster.

And although it has been touched upon, I don't think RPI is as relevant as people think. I remember (as I have said before) the NW talking about how prices were cheap because they were below the long term trend of growing in line with wages...

Get Scott posting here. His sig has that graph. It's a doozy.

[yawnIHateSundays]

So it looks like a clear 50% drop to get to trend?

Yes - I'm convinced that prices will have to fall such that the average house is around £90K. Then someone on an average income of say £25K can get a mortgage with a 10% deposit and just over 3x multiple.

[poppyseedbagel]

Should we not factor in that many more families now have two incomes: I know they often have high outgoings to match, but that must have a bearing on the trend surely?

[microbe]

I think house prices are tied to Real GDP per Capita.

This is a measure which implicitly accounts for changes in work patterns, e.g. two people working, bends with recessions and the impact on the economy of interest rate changes. (I think)

Try this:

Edited May 1, 2008 by microbe

[ARIMA]

There is one major flaw with that graph. Price should be on a log axis.

Technically yes, but you'll find it looks pretty much the same if you do.

[oracle]

It really does depend which trend you are following.

Are you following population growth in the UK,which follows a resonably steady uptrend.

or are you following Global Population growth?

This one has gone exponential over the past century.

Any decent Technical Analyst can tell you what happens with charts of this nature....THINK NASDAQ.

[brumroccoco]

"Is it possible that a lesson will be learnt in this crash.

It wasn't in the last one. The last one was seen as a small blip on a long term ever upward trend."

IMHO the ONLY thing mankind has learnt from history is that mankind never learns from history

[Leonard Hatred]

IMHO the ONLY thing mankind has learnt from history is that mankind never learns from history

Absolutely bang on.

And that every single bust has exactly the same cause - a boom.