Real terms house price falls - what is "real"

robmatic

Cleaver wrote: »

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?

I think you're probably right about people in general not thinking in real terms. Personally, I took inflation into account when making my decision to buy, but that's largely because I've spent too much time in my working life fiddling about with RPI index tables.

I care very little about whether house prices will rise or fall but I'm quite certain that in 24 years I would like to be paying off a 2010 mortgage with a 2025 salary.

IveSeenTheLight

robmatic wrote: »

I think you're probably right about people in general not thinking in real terms. Personally, I took inflation into account when making my decision to buy, but that's largely because I've spent too much time in my working life fiddling about with RPI index tables.

I care very little about whether house prices will rise or fall but I'm quite certain that in 24 years I would like to be paying off a 2010 mortgage with a 2025 salary.

Set your sights a bit higher.
If you increase your payments simply in line withyour wage increases you'll have paid off your mortgage long before 24 years

robmatic

IveSeenTheLight wrote: »

Set your sights a bit higher.
If you increase your payments simply in line withyour wage increases you'll have paid off your mortgage long before 24 years

Oh, I expect I will have paid it off long before term. Mortgage overpayments are a fantastic method of saving (much better than a cash ISA for instance). My point is that the mortgage amount is fixed in 2010 money so becomes increasingly easy to service.

IveSeenTheLight

robmatic wrote: »

My point is that the mortgage amount is fixed in 2010 money so becomes increasingly easy to service.

Indeed.
The debt becomes relatively smaller, whilst comparitive rents would be increasingly higher

geneer

HAMISH_MCTAVISH wrote: »

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

You're absolutely right Hamish.
However in the wake of the spectacular failure to predict the house price crash the bulls have had no choice but to manouvre themselves into the spurious "real falls = bullish" zone.

A fair chunk of the last house price crash was also real dontcha know.

Generali

chewmylegoff wrote: »

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)?

Like a lot of things with statistics it all depends what you're trying to measure really. Add to that the fact that the housing market is a very difficult thing to tie down and you can argue just about anything you want (and some posters on here really do).

For me, if you want to take a 'broad brush' measure of the value of a house, the major indices adjusted for RPI is probably the best way to go (strictly speaking the GDP deflator would be better than RPI but let's not over-complicate). The reason? It means that you are measuring the value of houses in general against the value of the money used to buy them.

If you want to measure BTL as an investment in the specific case then the stats are of no help at all. In general terms, you can make money using leverage if nominal house prices are rising but not as fast as inflation. Your above example is rather extreme as real house prices would have fallen 9.1% in the year but to finish with an extreme example, imagine you financed the above with a mortgage that is just covered by the net rent that you manage to gain and you only put down a £10,000 deposit. Your equity in the house has risen from £10,000 to £20,000 in nominal terms, a 100% nominal return or 80% in real terms.

For a FTB, then the relationship between wages and house prices is important. If said FTB is on £5,000,000 a year and looking to buy a house worth £100,000 or £110,000 then that relationship is of minor importance unless they have run up some serious debt in the past. I can't imagine too many people on £5,000,000 a year are on the DWD board but it would make quite a funny exercise in trolling.

chewmylegoff

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.

My point is that, in assessing whether The value of something is changing in real terms, you need to assess its cost relative to incomes, not other costs. People also keep saying QE is bolstering inflation because govt wants to inflate away debt. This also doesn't really work if wage inflation is flat, at least not in my simple mind it doesn't.

IveSeenTheLight

geneer wrote: »

You're absolutely right Hamish.
However in the wake of the spectacular failure to predict the house price crash the bulls have had no choice but to manouvre themselves into the spurious "real falls = bullish" zone.

A fair chunk of the last house price crash was also real dontcha know.

real terms reduces HPI / magnifies any downard correction.

Why would this be the position of so called "bulls"?

It would seem that the is the fall back of so called "bears" who fail to see the nominal falls they were hoping for.

Cleaver

geneer wrote: »

the bulls have had no choice but to manouvre themselves into the spurious "real falls = bullish" zone.

It's funny to think that if you got 100 people off the street to read this sentence 99 of them would have absolutely no idea what it was talking about.

chewmylegoff

Rinoa wrote: »

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

Can you explain why it's ok to post on a rubbish thread on an irrelevant internet forum, but somehow not acceptable to post a comment on a news article on the bbc website? I'm genuinely interested in the logical reasoning behind your post...I assume you won't be commenting on any news stories posted here in the future?