Nominal price falls are the same as the last crash. Discuss.

RenovationMan

Cleaver wrote: »

I find it really, really odd how both you and Hamish are obsessed with whether the 90s was a crash or not, or now is a crash or not, or whether this or that was nominal, real, crash, not crash etc. etc.

Does it really matter one iota what you or Hamish call it? Why do you care so much?

Especially odd when you consider that they were probably both still in short pants and reading the Beano back in the 90's.

ILW

RenovationMan wrote: »

Especially odd when you consider that they were probably both still in short pants and reading the Beano back in the 90's.

I bought my first flat in Dec 1989. I would have made a rubbish property speculator.

Generali

IronWolf wrote: »

You can't use RPI to measure inflation when looking at house prices, it includes House prices and mortgage payments.

You need to use CPI.

CPI wasn't in use in 1989. The ONS might have back calculated it though.

geneer

Generali, you might be interesting in this article.
Granted, it refers to only one statistical index, but its worth a read nonetheless.

House price falls currently around 30% in real terms.
Compared to real falls of 34% in the last crash.

http://blogs.telegraph.co.uk/finance/andrewlilico/100010665/a-little-noticed-milestone-this-week-house-prices-will-have-fallen-over-30-per-cent-in-real-terms/

A little-noticed milestone: This week, house prices will have fallen over 30 per cent in real terms

Unless something odd happens, this week is likely to see an interesting but under-announced milestone: falls in house prices, in real terms, from their 2007 peak, exceeding 30 per cent (on the well-known Halifax measure). In cash terms, house prices peaked in August 2007, and fell 22 per cent to March 2009. After picking up a little in the second half of 2009 and early 2010, they went back to falling from mid-2010, and have been broadly flat during 2011.
But because inflation is high, that flat performance in cash terms for housing in 2011 means that, after adjusting for inflation, house prices have been falling apace. In real terms, since January 2010, house prices have fallen a further 12 per cent.
Now I have some form here I should declare. I was one of the many economists that predicted that house prices would peak in 2004 and then fall around 30 per cent. Indeed, the issue on which economists have been most unified in my adult life was that house prices could not continue to rise after 2004. Of course, they did so – rising a further 25 per cent in cash terms, 14 per cent in real terms, after I was daft enough to call the peak in November 2004.
We house price bears are a hardy, arrogant bunch, though. And as prices continued to rise our general perspective was that it didn't make sense and would all end in tears, but there's only so many times you can go on TV and make an idiot of yourself, so from 2005 most of us simply shut up. Then when prices started falling again, we all re-emerged, blinking, into the limelight and recommenced our cheerful intonings. I gave one interview predicting peak-to-trough falls of more than 35 per cent, saying that once the Halifax index was down around 25 per cent it would be clearer how much more.
Now I had thought this would be in nominal terms, because I feared and expected deflation. Of course, there was a little bit of deflation in 2009 – peaking around 2 per cent – but not much. Instead, more of the work of eroding house price values has been done by inflation, as in the early 1990s and (even more so) 1970s. In the 1990s, house prices fell 15 per cent in nominal (cash) terms, reaching their pit in February 1993, but it was more than two years later (in September 1995) that they reached their pit in real (inflation-adjusted) terms, by which point they had fallen 34 per cent. Data doesn't exist in quite the same way, but real-terms falls in the 1970s were probably even larger.
In real terms, house prices are now about 20 per cent below the level at which I erroneously called the top of the market in November 2004. They are now back to the levels of 2002 – a year in which prices rose 19 per cent in real terms. If the experience of the 1970s and 1990s is duplicated, they would fall perhaps another 5 to 10 per cent. In my view they are only over-priced about 5 per cent now, compared with a plausible equilibrium value. But when there are large swings, markets overshoot. The price-earnings ratio is now around 4.4 (I think the equilibrium is about 4.2). In 1995, the price-earnings ratio fell below 3.1. Falling back to that would mean nearly 30 per cent further falls in prices – as much again as we've already had. Fingers crossed.

RenovationMan

What I don't understand from that article and certain property bear's stance on here is where is says:

"But because inflation is high, that flat performance in cash terms for housing in 2011 means that, after adjusting for inflation, house prices have been falling apace. In real terms, since January 2010, house prices have fallen a further 12 per cent."

Surely, unless we have pay inflation, house prices have simply fallen in line with the cash in everyone's pocket?

I don't understand what they are comparing against when they say house prices have fallen due to inflation. Well, so has everything else including our personal wealth. House prices might have fallen by 12% due to inflation but then our disposible income has also fallen by 12% too.

IveSeenTheLight

Generali wrote: »

The thing is, by looking at house prices in isolation, we are ignoring the value of the money used to buy those houses. From July 1989 to Feb 1993 the RPI rose from 115.5 to 138.8, an increase of 20%.

From Aug 07 to Mar 09 the RPI rose from 207.3 to 211.3, an increase of 1.9%!

There was a large decrease in the value of the money that houses were being priced in during the early 90s. That didn't happen in the late 00s.

Fair point, however if your looking at inflation, in terms of the cost of borrowing, shouldn't you also be lookingat wage inflation.

If someone bought at wither of those peaks and managed to "ride the storm", what would the likelyeffect be on their ability to pay the mortgage debt.

Natural assumption is that with wage increases, the debt becomes more affordable.

In fact I would recommend that if every mortgage holder increased their mortgage repayments when receiving pay increases, it saves years off the amortization period.