Monday, Sep 04, 2006

House prices: crash postponed or crash avoided?

No Monkey Business blog: House prices: crash postponed or crash avoided?

Previous articles on the 'No Monkey Business' personal finance blog have argued that the outlook for house prices in the medium and long term can be judged from the starting level of real prices (adjusted for general inflation) relative to their long-run history. Because housing represents such a large part of the stock of assets in the economy, it is sensible to assume that both the trend and the limits of past deviations are fundamentally justified, in an 'equilibrium' sense. The 'double top' in real house prices leaves them as extreme as in 1989 and 1973, each of which was followed by real price falls of about 30%. Avoiding a large correction is highly unlikely, acccording to this article. But even if prices level out for a long period, allowing equilbrium to be gradually re-established (as many 'bulls' hope), the opportunity cost will still be very high. In terms of the eventual wealth destruction for individuals, particularly where the opportunity cost is the real cost of borrowed capital, this is potentially a worse outcome than a bear market.

Posted by stuart fowler @ 01:32 PM (587 views)
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5 Comments

1. the bald man said...

Good technical article. In summary all markets revert to trend. Currently prices are unsustainably above trend by around 40%. Whether this corrects in the short or long term is the unanswered question.

Monday, September 4, 2006 08:15PM Report Comment
 

2. Redwing said...

Read this.

It's very balanced but when you read between the lines, there's a great bear lurking in there.

Recommended reading - can the webmaster make a more permanent link?

Monday, September 4, 2006 11:48PM Report Comment
 

3. the bald man said...

If one believes that markets always revert to a median trend (as is bourne out by historic data) and a market is trading above or below trend, unless there has been a fundamental economic change then the message can only be bearish. (for example the dot com boom). IMHO I do not believe any asset is different.

Tuesday, September 5, 2006 01:12PM Report Comment
 

4. markd said...

Very interesting-there are a number of other articles on the same site giving a clear and concise commentary on the market, technical but at the same time easy to follow.

Tuesday, September 5, 2006 01:42PM Report Comment
 

5. Stuart Fowler said...

Redwing asks for a permanent link. There is one on the blogs page of Resources.

It's good to see some comments. I suspended comment facility on nomonkeybusiness.org because I was spending too much time removing plugs for online gambling and drugs. I need to deal with this a better way.

As to the 'great bear', it's a realistic view of the range of probable outcomes rather than a prediction of what will be the outcome. I'm old enough to have learnt this is a more useful basis for advice. Forecasts of the profile of the reversion to equilibrium prices are important for timing decisions but the point of the article is also to remind people of the long-term cumulative cost of home ownership when paying too much with borrowed money. I call this 'wealth destruction' but for many households its impact is on disposable income and savings that would otherwise have been made. These long-term effects probably do make me a great bear, but they do not require being right about a crash.

Wednesday, September 6, 2006 01:43PM Report Comment
 

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