Wednesday, July 29, 2009

Average House Prices Will Fall To £70,345

Internships could tackle soaring unemployment

Ignore the actual article; I posted the first thing with unemployment in its’ title, so I could follow on from last night’s unemployment correlation post.

Posted by flashman @ 11:03 AM (1313 views)
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15 thoughts on “Average House Prices Will Fall To £70,345

  • 5000 placements will make a big dent in the unemployment figures.

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  • Sorry, I just got back in. I though this wasn’t going to get posted because I forgot to put in a password

    I’d thought I’d put together some simple data from the article, to show how twaddle-maths can still have meaning. Before anyone gets all picky on me, it is meant to be comedically simplistic and bogus in its methods. The point is that the answer is still meaningful.

    I compared the maximum unemployed number from two major recessions with their corresponding lowest house price (by corresponding I mean nearest because they are never in absolute lockstep). By averaging and combining the two sets of data we get a number for what average house prices could be as a result of unemployment reaching 3 million. We would then have to add inflation from the mid point of 1986 and 1993. I chose data from 1986 and 1993 because the unemployment numbers are similar to what we are expecting this time

    1986 Unemployment peak: 3.37 million
    Corresponding lowest average house price: £35,647

    1993 Unemployment peak: 2.78 million
    Corresponding lowest average house price: £52,885

    Therefore when we get to 3.075 million unemployed (average of the two house unemployment peaks) we will have an average house price of £44,266 (average of the two house prices). We then have to add in inflation since 1990 (roughly the mid point between 1986 and 1993). I used a readily available on-line inflation calculator for this.

    ANSWER: I can therefore say with absolute certainty 🙂 that the average house price in the UK will be £70,345, some time AFTER we get to 3 million unemployed.

    The method may be comically flawed to the power of 1000 squared but it certainly demonstrates the potential for calamitous falls in house prices and how far out of whack house prices really are. It is always foolish to lose sight of where any prices were in the near past. There are very few new paradigms.

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  • mark wadsworth says:

    Oh dear. Is this where the action is? I was merrily posting updates on an earlier thread on the same subject to day here.

    http://www.housepricecrash.co.uk/newsblog/2009/07/blog-bbc-reports-bank-of-england-figures-24567.php?comment=added

    @ Flashman, forget about adding indexation, it’s far better to work on basis of average house to average income multiples (which has never been lower than 3.5 or higher than 6). If the multiple in 1986 and 1993 was 3.5, then that’s what we are looking for now.

    Then of course we have a huge punch up over what average income means…

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  • A working analyst would crunch the numbers from the data series above and they would produce a number than shows that there is no meaningful correlation between unemployment and house prices. This is useless to us and obviously not correct. People without jobs usually cant pay their mortgage and they therefore usually sell their houses. When lots of unemployed people sell their houses, prices fall.

    So we look at the data again, reference a few highly regarded papers on the subject and think about it some more. We eventually realise that only abnormal levels of unemployment have any serious effect on house prices and that the effect is not linear. Consequently we selectively discard some data (or weight the good stuff) and get a different correlation coefficient. In this way a more realistic number is produced than by blind mathematics alone. A ‘prissy’ analyst would snort indignantly at the method but sometimes when we need useful information, this is the only way.

    No matter how you run the numbers on interest rates, there is little or no useful correlation with house prices. It is surprising in a way, but not when you consider that an interest rate has far more complexity behind it than unemployment

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  • Sorry, I meant to post my last comment (@5) on the other thread (about the spread sheet data).

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  • mark wadsworth says:

    “No matter how you run the numbers on interest rates, there is little or no useful correlation with house prices”

    That would appear to be true (which is surprising), but maybe it’s a question of REAL interest rates (which are much more stable), i.e. with whacking inflation of 20% and interest rates of 25%, the FTB just grits his teeth for a couple of years and pays over half his income as mortgage repayments and then a few years later the fraction of his income paid to the bank falls to ten per cent or something.

    Or maybe it’s a question of interest rate CHANGES rather than absolute levels.

    I dunno. I’m all statted out for today.

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  • I think it’s because interest rates have historically been both high and low during past recessions. The government has not always been able to get them where they want them to be. Unemployment, on the other hand, has almost always been high during recessions

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  • I’ve managed to get embroiled in this towards the end of this with Lucky Jim!

    http://www.housepricecrash.co.uk/newsblog/2009/07/blog-bbc-reports-bank-of-england-figures-24567.php

    “People without jobs usually cant pay their mortgage and they therefore usually sell their houses. When lots of unemployed people sell their houses, prices fall.” Yes but LJ seems to be arguing that you cant work that out and that normally that is caused by higher IRs. I just said that a Minsky moment was the reason this time, that that has caused an economic contraction and that will cause more unemployment and that that will cause more HP falls.

    I dont know where this unemployment tipping point is though but my point was it ADDS to the losses and not that the losses are finished because there has been a different cause of HP falls this time and that therefore (as LJ is saying) since unemployment has not this time caused this fall – what makes us think it will add to it? [at least thats what i think he is saying] The cause is the CC which puts into effect an economic contraction which causes unemployment which affects HPs.

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  • techie: we live in an infinitely complex system and the infinite variables contained in this system act kinetically on each other. Everything therefore affects everything else. The original argument was based on the reaction between just two variables. For practical reasons we are entitled to consider the relationship between just these two variables but if anyone objects to the over-simplification inherent in this, then they are only entitled to do so, if they are prepared to add an infinite number of other variables to the mix. The over simplification argument is technically correct but of course in the working world we must disregard it because it is impossible to include an infinite number of variables. Adding just a few is fooling ourselves.

    There has, indeed, historically been an apparent tipping point when unemployment more seriously impacts house prices. To see this you have to judiciously prune or weight the data in the way I suggested above.

    No matter how you prune the data there is no useful correlation to be found between interest rates and house prices. It is entirely wrong therefore to conclude that interest rates have historically been the cause of house price movements. They might be in the future but we have no justification for making the claim now. I gave the most likely reason for this @8 i.e. interest rates have sometimes been high or low in a recession and high or low in a boom. We have previously seen house prices fall and rise in a low interest rate environment and vice versa

    Re the original unemployment/house price correlation. It is a matter of philosophy how you take meaning from the apparent high correlation. It can be that one causes the other or it can be one goes hand in hand with the other. The latter gels more with your contraction theory. It doesn’t matter either way, if we all agree that higher unemployment is coming because … We can chose to believe that it will cause unemployment or we can chose to believe that it will be accompanied by unemployment. Same difference and same result.

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  • Ognoring their interaction, unemployment is almost entirely driven by market forces whereas interest rates are set by a monopoly. So unemployment is likely to be a better indicator of house price than interest rates. However one could look to real interest rates as suggested.

    How about a two dependant variable analysis:
    The spread of the best available tracker over base; and
    The highest available LTV for a first time buyer.

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  • err Ognoring, whilst a groovy new word should read Ignoring 🙂

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  • techie: Or put another way, I agree with you

    666: It would be interesting to use Real interest rates instead of nominal interest rates but I have a suspicion, that it is just a way of pointlessly back-dooring inflation into the equation. The Real interest rate is really only an approximation unless you use a Fisher equation, in which case you are back-dooring other stuff as well. As you know, Real interest rates in their simplest form are just nominal interest rates minus inflation rates, so it would not produce anything particularly different but the inflation component might muddy things up. It might still be interesting though

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  • 666: I usually find it easier to make inflation adjustments to the output, rather than making it part of the input

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  • wow i just wasted 2 minutes of my life reading this garbage.

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