• Stuart Fowler

Update on real house prices

The Nationwide index in real terms was up 1.3% in the first quarter. Londoners have seen a feeding frenzy but the boom in financial and related services has renewed house price growth beyond the capital. Our long-run charts of real house prices are updated below. The unusual feature is not the degree of deviation from trend but its persistence – making lots of ‘stale bears’.

The reason is simple: booming service industries, particularly finance. It makes house prices a bet on the stockmarket. Ironically, the most likely proximate cause of the end of the global bull market in financial assets is the bursting of the US house price bubble. As my item “Drowning in debt: the American way” suggests, it looks like it is all starting to unwind. I also update the US house price index featured in my post in September. This one you can cleverly experience as a roller coaster video.

The Nationwide index from 1957 deflated by the RPI general inflation is a relative measure of house prices. Whereas building costs might reasonably be expected to reflect general inflation over long periods, land prices have tended to rise in the UK. Restricted land availability has left real incomes as the main explanatory factor, rather than building costs. The fitted growth trend for the whole period is 2.6% – a figure which benefits from the last up-cycle, before which it was barely above 2%. This is about in line with long-term real incomes growth.

In the graph we show the full-period regression and also a moving trend fitted to the data known at the time.

In the second graph we show the index as a ratio of the two trends. These define the extent to which real prices have deviated from a logical, sustainable trend. They can be seen as a measure of value. The graph shows the rise in prices as broadly consistent with previous cycles. The extent of the previous down-cycles is surprising to those used to measuring prices in nominal or money terms. Past cycles have been distorted by high inflation. This one will be experienced very differently – unless general inflation is about to pick up a lot.

The US index, Case Schiller (maintained by S&P) is a measure of used homes. My previous reference to it in September was from a piece of academic research and is not nearly as well known in the US as the Nationwide index is here. Since then it has achieved some fame, not least after a video version of the historical plots as a roller coaster ride has spread virally. Try it.

The data is shown below. The explanation is along the lines of my September post. Note a technical difference compared with my version of the Nationwide index: I prefer log scale. Without it, the helter skelter rises exponentially – good for dramatic effect but misleading.

Whatever the scale, the message is clear: this is an unprecedented event in the lifetime of most Americans. Not only have they not been able to assume that land prices would grow in line with incomes (2% pa makes a lot of difference over a lifetime) but they have also seen much lower cyclical volatility – although not what the roller coaster implies. Until now. The reasons and the likely consequences are explained in my US debt article.

The week end papers reported warnings from GE, one of the largets credit providers, that the problems with arrears on subprime loans were also affecting self-certification mortgages. This is not surprising. The key link in the contagion thread is credit-based hedge funds, however.

Banking-sector developments are probably more important as indicators of trouble ahead than US house prices themselves. These are quite likely to lag financial-market perceptions of the state of the bubble.

#houseprices #realterms

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