Inflation Adjusted House Price Graph Since 1983

[profitofdoom]

If the crash was to follow the same path the make up of the housing stock would have to be broadly similiar to that in the 90's. However, the massive boom in building of 1 and 2 bed flats mans that there is a much larger portion of lows cost homes to high cost homes which will almost certainly drag the average down.

Clearly it's not possible to directly compare an historic event such as the 90's crash with what we are seeing,there are just too many different factors.One of the main influences is the large number of people buying speculatively just to make a profit and now we can see that anyone who did this in the past three years is going to lose out unless there is some other factor in the equation.The speed and steepness of the fall however does mean that this "event" will burn itself out relatively quickly,my guess is that by the end of 2009 prices will stabilise,albeit at a figure maybe 20% below where they are now,which will be 40% off the peak,add in inflation and prices will have halved.At that point however property will be cheap and rental returns for new investors perhaps as high as 10% with the added bonus of a small recovery bounce.

[JustYield]

Doesn't using a 5.9% HPI essentially mean that high house prices are justified because we have had an almost parabolic rise in house prices from 2001 to 2008?

I could do the work myself but does anyone have any idea what the HPI was from say 1983 to 1998? I suspect that it might be lower than 5.9% which significantly alters the "bottom" that this model predicts.

This is what I was going to suggest - you need to strip out the bubble years to get a meaningful average deflator (less than 5.9%). The peaks don't need to, and probably shouldn't, line up given what we know about this baby-boomer, blow-off credit bubble.

Would it be hard to redo the graph with a 3.5% deflator (or whatever the non-bubble trend growth was - clue: likely to be close to GDP)?

Nice to see some intelligent analysis on the main page again.

[0q0]

I think that graph is not too far off the mark. And shows we are currently about 2/3rds through HPC.

Theres too many variables nobody takes into account when predicting prices will drop to 3.5 times average single salary. Like the fact that for the first time in history, average household income is now almost 1.7 times average single salary, due to the sociatal shift to multiple wage earners in a household. Even in the 80's crash, this was rare, now it's almost universal, making affordability a completely different reality for most.

2/3 through the decline in prices? Well then I must have a very poor grasp of how much better the situation is than all the barometers and common sense suggests.

Obviously unemployment will contract in 2009 and 2010, and the world economy will just throw a switch and recover.

I'd previously thought the only thing that meant we could be anywhere near the end of a decline in prices was massive inflation.

I am obviously wrong then when I see prices slightly bounce or stabilise around now or within Q1 and then decline again for years.

[zafonic]

Hi all

Does anyone know where I can access the IG Index prices. I used to monitor the spreadfair projected spreads but sadly they are no more.

Thanks

[Joey Buttafueco Jr]

Hi all

Does anyone know where I can access the IG Index prices. I used to monitor the spreadfair projected spreads but sadly they are no more.

Thanks

Why not use TFS?

[Joey Buttafueco Jr]

This is what I was going to suggest - you need to strip out the bubble years to get a meaningful average deflator (less than 5.9%). The peaks don't need to, and probably shouldn't, line up given what we know about this baby-boomer, blow-off credit bubble.

Would it be hard to redo the graph with a 3.5% deflator (or whatever the non-bubble trend growth was - clue: likely to be close to GDP)?

Nice to see some intelligent analysis on the main page again.

I put some data here

http://www.noelwatson.com/blog/PermaLink,g...e984ff9619.aspx

and here

http://www.noelwatson.com/blog/PermaLink,g...1d6cc283da.aspx

[LuckyOne]

This is what I was going to suggest - you need to strip out the bubble years to get a meaningful average deflator (less than 5.9%). The peaks don't need to, and probably shouldn't, line up given what we know about this baby-boomer, blow-off credit bubble.

Would it be hard to redo the graph with a 3.5% deflator (or whatever the non-bubble trend growth was - clue: likely to be close to GDP)?

A couple of days ago, I superimposed the Halifax quarterly HPI (Series 1) against 3.5x the average income that the Halifax used to calculate their affordability index (Series 2) from Q1 1983 to Q3 2008.

In the end, it is income that drives house prices as that is what we use to pay for houses (either in cash or to service the debt that we take on). Some have quibbles about the average income number that the Halifax used. While I accept the quibbles, the data is applied consistently so it is a like for like comparison and is a reasonable fit apart from the two bubbles and one crash in the series.

The result is that current "fair value" seems to be at around GBP 120,000. Given the size of the bubble that is now bursting as well as the potential for stagnating or even decreasing income, there is no reason to dismiss the possibility that we significantly undershoot what is probably the best case result for the trapped longs who don't find a "greater fool" on the way down.

These results seem to confirm the gist of the results of other studies done here. Whenever I see similar results from very different approaches to a problem, my confidence in the prediction rises.

[zafonic]

Why not use TFS?

Sorry Noel, what is TFS?

[LuckyOne]

Sorry Noel, what is TFS?

Tradition Financial Services I think. They are a money broker who are good in IPD derivatives.

[camem']

Tough crowd...

Would it be hard to redo the graph with a 3.5% deflator (or whatever the non-bubble trend growth was - clue: likely to be close to GDP)?

I actually think the non-bubble growth was the same, because the lows lined up as well as the peaks at 5.9%. Anyway, here's 3.5%

[Joey Buttafueco Jr]

Sorry Noel, what is TFS?

http://www.tfspropertyderivatives.com/pdf/...2008/Dec-08.pdf

[spline]

The TF numbers look like they might be useful but they're more than a bit unclear and confusing…

Take their latest Dec/08 TF HPI Residential Property, table and graph top right on page 3, for example:

1. in the table Nov-09 should read (I think?) Nov-08.

2. Halifax NSA quoted for ‘prevailing end Oct-08’ is really Halifax NSA Sept-08.

3. what does ‘one year hence’ mean: Oct-09, Sept-09, Dec-09?

4. can't find links to methodology, etc.

Edited January 3, 2009 by spline

[evictee]

For those who don't know, this is the halifax figures rebased (adjusted to Jan 09 prices) as if there was 5.9% long term inflation. This value is chosen to make the peaks and troughs line up so we can judge this crash against what has gone before. Before you all point it out, I know today's headline inflation isn't 5.9%, however the average HPI over the last 25 years has been so it's a better adjustment for this type of graph.

Pretty isn't it ? I'd say we're over half way through the crash already. Good news, as they say, for some.

Are you suggesting that we're already over half way through this crash on the assumption that the next trough will line up with the previous one? The only reason the previous (two) troughs line up is because you've adjusted the inflation value until they do.

I can't believe we're any way near half way down yet. We'd better not be.

[Joey Buttafueco Jr]

The TF numbers look like they might be useful but they're more than a bit unclear and confusing…

Take their latest Dec/08 TF HPI Residential Property, table and graph top right on page 3, for example:

1. in the table Nov-09 should read (I think?) Nov-08.

2. Halifax NSA quoted for ‘prevailing end Oct-08’ is really Halifax NSA Sept-08.

3. what does ‘one year hence’ mean: Oct-09, Sept-09, Dec-09?

4. can't find links to methodology, etc.

1. Agreed

2. Yes, I assume people are betting on a tenors

3. Yes

4. Think it is pretty simple - institutional equivalent of Spreadfair

It may be worth going through some of their previous newsletters to see if it may be of any use

URL is easy to change

http://www.tfspropertyderivatives.com/pdf/...2007/Dec-07.pdf

[spline]

Yes, worth a google for old copies.

Hit the Jackpot with Strut & Parker - goes back to Jan/07

http://www.sprefs.com/index.php?page_id=169

They've constucted it as some sort of rolling future HPI whereas the derivative contracts are at fixed future points (e.g. Q3/2009, etc.) so I suppose they are doing some sort of interpolation or curve fitting. Anyway, for the time being I'll timeline their numbers for the month before their publication date and correct if needed when we have a bit more info to hand.

I've updated the house price predictor to include Tradition Future prices and implied HPI

http://www.houseprices.uk.net/articles/ho...price predictor/

Agrees reasonably well with the Nov/08 Spreadfair futures although marginally more bearish.

Edited January 3, 2009 by spline

[camem']

Are you suggesting that we're already over half way through this crash on the assumption that the next trough will line up with the previous one? The only reason the previous (two) troughs line up is because you've adjusted the inflation value until they do.

I can't believe we're any way near half way down yet. We'd better not be.

Yep, the assumption would be that when they're as affordable as they were the last two times they stopped falling, they'll stop falling this time round too. Unless it's different this time, in which case the 3.5% graph might be a better starting point to make your own estimates.

From the graph looks like we'll know in jsut a few months whether it really is different this time (i.e. stop at 130,000 or keep falling).

Also remember there could be wild inflation over the next year, but my graph would still correct for 5.9%. In this case everyone could be right - it bottoms out at the same level as before in the graph, but the real cost is much lower than 130,000 in today's money

[silver surfer]

It makes the graph peaks and troughs line up. That's the best indicator we've got (using halifax figures since 1983, anyway) for long term HPI.

Hey? Using an assumed 5.9% inflation rate to make "peaks and troughs line up" doesn't sound like solid statistical practise to me!

If inflation turns to mild deflation during 2009, as many pundits expect, then nominal house prices will have much further to fall than your chart suggests before resembling previous experiences.

[stillwaiting]

At what percentage off-peak values you buy at, 70%, 60%, 50% or is it too early to call?

[Bloo Loo]

Whats all this with graphs and the end of HPC next week.

normal house prices average at 3.5* average wage.

thats about 90 K for an average house, half that for a entry level flat and once and a half that for the 4 bed detached in nice location.

Dont need a graph, simple maths will do.

[grizzly bear]

I think that graph is not too far off the mark. And shows we are currently about 2/3rds through HPC.

In London prices have hardly fallen. Asking prices haven't fallen at all. And sales prices haven't fallen that much - probably still similar to 2006. London prices WILL fall and what impact will that have on the graph?

[LuckyOne]

In London prices have hardly fallen. Asking prices haven't fallen at all. And sales prices haven't fallen that much - probably still similar to 2006. London prices WILL fall and what impact will that have on the graph?

This might be the source of a dead cat bounce.

If a few more expensive homes sell at reasonable discounts in enough volume, that may be enough to push Nationwide and Halifax indices higher. The Land Registry numbers have (by definition) a perfect quality adjustment so any bounce in the Nationwide and Halifax numbers should be ignored if it is not confirmed by the Land Registry numbers.

We are about due for a dead cat bounce which should probably be ignored anyway. We have seen a divergence between price and value from 2001 to the present so it is not impossible for the divergence to widen out again for a short period of time before it gets overwhelmed by the economic reality we face.

[Joey Buttafueco Jr]

In London prices have hardly fallen. Asking prices haven't fallen at all. And sales prices haven't fallen that much - probably still similar to 2006. London prices WILL fall and what impact will that have on the graph?

Have you checked the Halifax numbers?

[grizzly bear]

Have you checked the Halifax numbers?

Yes, although my comments were based antecdoctally - based on my experiences looking at asking prices and my friend selling her house!

The Q4 regional numbers have not been released. I am very interested to see them!

At the end of Q3 the average London property was £269,723 (high was £322,769 in Q3 2007) - so drop of 16%. But that only takes the index back to Q3 2006.

Another 16% drop however, would take the index back to Q3 2003!!!!!!!!

[DinosaursAreAwesome]

That graph is basically worthless imo, all it really demonstrates is:

1. Prices are falling faster than in the nineties

2. As a result they will probably fall proportionaly further

3. Current HPI is 5.9%pa since 1983 and falling, but what significance that statisitic has, if any, is lost on me.

[Giordano Bruno]

Pretty isn't it ? I'd say we're over half way through the crash already. Good news, as they say, for some.

I don't see that or agree with that at all. You seem to be assuming that the pattern will repeat in exactly the same way. There is not one iota that I can see to support that assumption. If you had contrived a pattern which repeated itself, say, 3 or 4 times, I might give your deduction more credence.

Since time is the axis which has not been tampered with, I would look at the timing only.

Looking at the timing, we seem to have hardly even begun the hpc. We are in the very early stages.

imo.