Real terms house price falls - what is "real"

chewmylegoff

There is a lot of blurb, mostly coming from omnivorous furry animals with big teeth, about "real terms" declines in house prices, which are apparently a lot more important than nominal price variances.

When considering the price of a house, they say, you have to take into account inflation. Therefore if inflation is 5% and house prices increase by 3%, the price of the house has actually fallen, in real terms.

Is it correct to say that house prices are falling in real terms, by comparing house prices to RPI or CPI?

Or is that just a crock of old poo.

Say house prices increase from £100,000 to £110,000, and RPI is running at 20%. If my salary remains the same (£5 million for those of you who are wondering), then house prices have not fallen in "real" terms as far as I am concerned. Instead, they have got more expensive.

So, my point is that what is really relevant is not RPI or CPI, but the following (and mostly (i)):

(i) rate of wage inflation (net of taxation rate inflation).

(ii) the net interest rates on savings vs. rate of increase in house prices.

Further, if RPI is running at 5% and your wage is flat, then even if the price of a house remains stagnant in nominal terms, it is becoming more unaffordable and therefore arguable more expensive in "real terms", as the amount of wage you have to spend on the house is getting squeezed by the price of everything else.

At the moment, wages are not increasing by anything like the rate of inflation, so is it actually correct to claim that we are seeing "real terms" falls in house prices?

Or am I just being incredibly dim (again)?

HAMISH_MCTAVISH

"Real terms falls" is the transparently desperate fall-back position of the usual suspects.

To put it bluntly, with the average mortgage at 3.5%, the average rent at 5.5%, and the average house price growing by 0.6% in the last year, then a renter is 2.6% of the value of a house worse off than a buyer.

That other things also got more expensive doesn't change that fact one bit.

"Real terms" falls are a nonsensical construct by those who are desperate to save face and bitter about being proved so very badly wrong.

the_flying_pig

'real house price' is, in general, a very meaningful concept.

its relevance is closely related to your point (ii) - it's designed to reflect yer opportunity cost of holding capital in a house rather than doing something else with it such as putting it in an interest-bearing savings account. now, precisely calculating opportunity cost is very difficult since, well, very often home ownership will be more leveraged than other asset holdings, also there are a million and one different things you can do with your money [e.g. all savings accounts pay different rates], also there are tax differences etc. i think that using the rate of inflation as a proxy for opportunity cost is attractive in that there's one [well, two] published number that everyone understands & agrees on and it kind of makes sense that someone should be able to at least break even [post tax?] on an inflation-adjusted basis.

the current situation is that we have a unique combination of ZIRP and >5% inflation p.a. this means that the rate of inflation is actually a fairly awful proxy for the opportunity cost of holding capital in a house. so right now, at this very moment in time, real house price is not a very meaningful measure. the usefulness of 'real house price' as a concept is, i'm afraid, another temporary casualty of our current mega-loose monetary policy. but i'm sure it'll have its day again before too very long.

CLAPTON

there are many ways of presenting figures; it's up to you to determine the relevance to yourself

that's how it is.

Graham_Devon

HAMISH_MCTAVISH wrote: »

"Real terms falls" is the transparently desperate fall-back position of the usual suspects.

To put it bluntly, with the average mortgage at 3.5%, the average rent at 5.5%, and the average house price growing by 0.6% in the last year, then a renter is 2.6% of the value of a house worse off than a buyer.

That other things also got more expensive doesn't change that fact one bit.

"Real terms" falls are a nonsensical construct by those who are desperate to save face and bitter about being proved so very badly wrong.

Thanks for your "no added bitterness" explanation

Rinoa

Graham_Devon wrote: »

Thanks for your "no added bitterness" explanation

Well, he's not so desperate that he feels the need to comment on BBC websites.

Graham_Devon

Rinoa wrote: »

Well, he's not so desperate that he feels the need to comment on BBC websites.

You what???

Can you translate?

IronWolf

Of course you have to take into account inflation, every year money buys you less, therefore is worth less. You'd have to be simple to not take that into account when assessing whether something has got cheaper or not.

IveSeenTheLight

the_flying_pig wrote: »

'real house price' is, in general, a very meaningful concept.

its relevance is closely related to your point (ii) - it's designed to reflect yer opportunity cost of holding capital in a house rather than doing something else with it such as putting it in an interest-bearing savings account. now, precisely calculating opportunity cost is very difficult since, well, very often home ownership will be more leveraged than other asset holdings, also there are a million and one different things you can do with your money [e.g. all savings accounts pay different rates], also there are tax differences etc. i think that using the rate of inflation as a proxy for opportunity cost is attractive in that there's one [well, two] published number that everyone understands & agrees on and it kind of makes sense that someone should be able to at least break even [post tax?] on an inflation-adjusted basis.

the current situation is that we have a unique combination of ZIRP and >5% inflation p.a. this means that the rate of inflation is actually a fairly awful proxy for the opportunity cost of holding capital in a house. so right now, at this very moment in time, real house price is not a very meaningful measure. the usefulness of 'real house price' as a concept is, i'm afraid, another temporary casualty of our current mega-loose monetary policy. but i'm sure it'll have its day again before too very long.

The problem with utilising real terms is that it's reflective of what's happened in the past and is no gaurantee of what is to come. (sound familiar:))

Potential buyer need to look at their local area, determine how it's performaing, make an educated best guess as to what might happen, factor in a bit of tolerance (contingency) and work out what is best.

In most cases, it would appear that those that have bought (including some instances since 2007) fare better than if they had not.

Cleaver

IronWolf wrote: »

Of course you have to take into account inflation, every year money buys you less, therefore is worth less. You'd have to be simple to not take that into account when assessing whether something has got cheaper or not.

You're right when you say that your money buys you less, of course you are. But in the real world people don't think about that when buying a house.

In early 2002 we decided that we wanted to buy our first house. I was on £21,000 and Mrs C was on £14,000. We set ourselves the goal of saving about £800 a month for just under two years so that we had a 10% deposit. We decided that our upper budget was around £120,000. In the two years we saved we both ended up with new jobs paying a bit more, we managed to save £20,000 and we bought a place for £125,000 in January 2004. I have no idea what inflation was doing at that time, and didn't frankly care. We just set ourselves a goal and saved. We had to adjust our house accordingly, because when we started saving £120,000 would buy a 3-bed terrace but by 2004 it didn't. So HPI was a factor. But inflation? Who, in the real world, really cares unless it's massively high?

We bought a house in 2009 and if we sell it in 2019 for exactly the same price then I'll see that house as retaining the same value. As if we buy another house that will be the same price as it was in 2009 too. I guess it'll be cheaper compared to our wages, but I hope I'll be earning double what I do now by 2019 anyway.

Cleaver

the_flying_pig wrote: »

'real house price' is, in general, a very meaningful concept.

its relevance is closely related to your point (ii) - it's designed to reflect yer opportunity cost of holding capital in a house rather than doing something else with it such as putting it in an interest-bearing savings account. now, precisely calculating opportunity cost is very difficult since, well, very often home ownership will be more leveraged than other asset holdings, also there are a million and one different things you can do with your money [e.g. all savings accounts pay different rates], also there are tax differences etc. i think that using the rate of inflation as a proxy for opportunity cost is attractive in that there's one [well, two] published number that everyone understands & agrees on and it kind of makes sense that someone should be able to at least break even [post tax?] on an inflation-adjusted basis.

the current situation is that we have a unique combination of ZIRP and >5% inflation p.a. this means that the rate of inflation is actually a fairly awful proxy for the opportunity cost of holding capital in a house.

This is a wonderful post which demonstrates how deeply we on this forum look at buying a house. No one in the real world thinks this way. People in the real world just think, "the houses down this street were £150,000 in 2008, they were £150,000 last year and they are £150,000 now. Therefore they are the same price and haven't lost or gained any value." That's simply the conclusion 90% of people would make, so that's the way to think.

Who was it that said that economics is the study of people and the way they think and act, not the study of finances?