Thursday, November 29, 2007

Time averged housing data

Man in a Shed was at a meeting of engineers last night, where the presenter explained how control engineers love things like tank inventories as the smooth out disturbances. However this comes at cost else where as the trend is to reduce inventories in process plant to reduce any risks associated with them.

This popped back into my mind when looking at house price data. The headlines from the BBC web site say that annual house price inflation has changed from 9.7% reported in Oct to 6.9% now, with this month seeing a fall of 0.8%.

Now lets pretend we believe the CPI inflation index which is at about 2.1% ( RPI - the measure we used to use before Gordon changed things recently is at 200% that rate at 4.2% !!! but I digress ). A monthly fall of 0.8% - if it happened in every month of the year would be equivalent to about a 7.3% drop in house prices, even taking credit for normal inflation ( about 0.17% per month at current rates for CPI ).

So it is possible to argue that house prices are falling at a rate equivalent of 7.3%/year if you just use this months data!

Now house prices changes do vary from month to month - sometimes jumping up, sometimes down. So this is just a mathematical exercise. But the point of this exercise is to point out how historic data is being used to calm fears and panic. It is only valid if we are in an identical situation to the previous 11 months - I suspect this is not the case.

Given that the bubble aspect of recent housing price rises it is likely to pop (especially once people perceive an end to the price inflation), with people no longer fearing the escalator of future house price rises making them make unwise borrowing arrangements at the same time as many people will see their mortgages renegotiated for rises of up to 3% it is not unreasonable to expect a further house price correction.

PS Its worth looking at the NSO's inflation figures and to wonder a bit about RPI and Gordon Brown decision to switch to his new method of calculating inflation CPI. MiaS thinks something is up - and its inflation.NSO's inflation figures at Oct 2007. The RPI is a closer guide to what life is costing you if you have a mortgage.

Update: Morgan Stanley's chief UK economist David Miles warned that prices will drop 10 per cent next year. Reports the Daily Mail on 4 Dec 07. - see told you.


Ellee said...

Prices might go down for now, but how long before they rise again? Unfortunately, salaries do not increase at the same rate, I really pity young couples who struggle to buy their first home.

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