The Nationwide reports that house prices have fallen 4.4% in the last 12 months. What does this really tell us?
I don’t just mean the report is uninteresting because housing is not net wealth. What I mean is: what relevance does a national aggregate have for actual individuals?
Few people believe inflation is really as low as 3%, because their personal experience tells them it’s more than this. So why should we think another aggregate is relevant to individual experience?
Put it this way. When I had my flat valued, the highest valuation was more than 10% above the lowest. 4.4% is therefore only a fraction of the idiosyncratic uncertainty about a particular property’s price.
Or put it another way. What matters for your house price are local conditions: is a local employer expanding or not? Are transport links improving? Is crime rising? Have gypsies moved in nearby? Are they planning to put up a big new housing estate? These local factors can swamp national ones.
This study of the US found that city-wide price moves can explain only one-fifth of the variation in returns on housing at the zip-code level.
Phil and Kirstie are right: it’s all about location, location, location.
You might think this is just trivial. After all, the average is right, on average. There can be no doubt that average prices are falling.
True. But I think this does have two implications.
First, it’s another reason why a drop in house prices might not have disastrous effects on consumer spending. Local variations, when allied to the optimism bias, cause even those long of housing to think: “things aren’t that bad round here.” Although this attitude helps sustain consumer spending, it can cause housing transactions to fall badly, as sellers continue demanding excessively high prices as the market falls.
Second, it means individual house prices are more volatile than national data pretend. I suspect this is part of the reason why people own so much housing and so few shares. If the national news reported the price change on 22 Acacia Avenue, Sidcup every day, as it does for the FTSE 100, I suspect a lot of people would regard housing as a riskier investment than they do.
I don’t just mean the report is uninteresting because housing is not net wealth. What I mean is: what relevance does a national aggregate have for actual individuals?
Few people believe inflation is really as low as 3%, because their personal experience tells them it’s more than this. So why should we think another aggregate is relevant to individual experience?
Put it this way. When I had my flat valued, the highest valuation was more than 10% above the lowest. 4.4% is therefore only a fraction of the idiosyncratic uncertainty about a particular property’s price.
Or put it another way. What matters for your house price are local conditions: is a local employer expanding or not? Are transport links improving? Is crime rising? Have gypsies moved in nearby? Are they planning to put up a big new housing estate? These local factors can swamp national ones.
This study of the US found that city-wide price moves can explain only one-fifth of the variation in returns on housing at the zip-code level.
Phil and Kirstie are right: it’s all about location, location, location.
You might think this is just trivial. After all, the average is right, on average. There can be no doubt that average prices are falling.
True. But I think this does have two implications.
First, it’s another reason why a drop in house prices might not have disastrous effects on consumer spending. Local variations, when allied to the optimism bias, cause even those long of housing to think: “things aren’t that bad round here.” Although this attitude helps sustain consumer spending, it can cause housing transactions to fall badly, as sellers continue demanding excessively high prices as the market falls.
Second, it means individual house prices are more volatile than national data pretend. I suspect this is part of the reason why people own so much housing and so few shares. If the national news reported the price change on 22 Acacia Avenue, Sidcup every day, as it does for the FTSE 100, I suspect a lot of people would regard housing as a riskier investment than they do.
Flipping this around, if newscasters reported the price change of an individual stock (say RBS, Barclays, or M&S) as much as they reported as they reported nationwide house prices indices, people may think stocks are more risky than they actually are.
Posted by: Riz | May 29, 2008 at 02:51 PM
True - but idiosyncratic risk in shares can be diversified away easily. Idiosyncratic risk in housing is far harder to diversify.
Posted by: chris | May 29, 2008 at 03:14 PM
Good point - another reason why I'd rather rent. Houses are big lumpy things...both nest and nest egg at the same time.
Posted by: Riz | May 29, 2008 at 05:22 PM
spot on, in the last crash many areas experience falls of well over 50%, some even up to 80-90% - flats in poor and inaccesible parts of london - like graves end, dartford etc.
However, a nice 5 bed detached in surrey etc barely lost 10%, even at the bottom of the market. This is before you even factor in good agents/bad agents etc.
Localism is everything in house prices; as you point out national statistics are utterly meaningless.
Posted by: cityunslicker | May 29, 2008 at 05:30 PM
Speaking as a developer, I can assure you that everything relates to location.Quality of build, size etc etc have a bearing but tiny in comparison to the location. Your remarks about house prices in Surrey from say 1989 - 1994 are correct, and so they are for lots of other enclaves. What is worth the money is the piece of ground the house is built on - which is one of the reasons that in Australia property taxes are based on the land, not on the building on it.
Posted by: kinglear | May 29, 2008 at 06:48 PM
.. and by the way, although I find Kirstie attractive, I'm sad the somewhat undressed young ladies are no longer in evidence.
Posted by: kinglear | May 29, 2008 at 06:49 PM
You can live in a house (even in lots of house). You can't live in some shares. People (not unreasonably) worry about having a secure roof over their heads before worrying about investments.
Posted by: Sam | May 29, 2008 at 07:25 PM
"...22 Acacia Avenue..."
Do we have a closet / reformed / actually existing Iron Maiden fan around these parts?
Posted by: Quinn | May 29, 2008 at 07:50 PM
In my country, Greece, people have their own unique relationship with the meaning of the House.From the ancient years,as an opposite force to the death instict.Well, the prices are high here because of the STRONG DESIRE,the almost ''mechanical'' demand for houses.The idiosyncracy in the prices is because of the non-disclosured limits between the meanings of Use and Ownership.A lot of people made money by building houses,but now,in Greece,the banking octapus started to win the game...A young family is prisoner of its own desire for a Home...Nomads in the cities, the modern Greek are often afraid of their future and the use the ancient custom of building houses as an exorcism of this fear...
Posted by: Elias/Cognitariato/Left Libertarian | May 30, 2008 at 02:28 PM
I love that from Elias. The pagan symbolism of building a house to exocise fear is perfect. Except you're then petrified the mortgage will gobble you up...
Posted by: kinglear | May 31, 2008 at 02:16 PM
I wonder how many people buy rather than rent as a way of ensuring that they are in the catchment area of the school they want? Any figures on that, anyone?
Posted by: dearieme | June 02, 2008 at 01:16 PM
A housing market crash is more like a phase transition. The market disappears, and then eventually reappears with prices at a much lower level.
The number of transactions is the key. Well down ...
Posted by: Dipper | June 02, 2008 at 07:31 PM
I would rather rent anyway. It has many more benefits with the housing market the way it is.
Posted by: Schumacher Homes Press | October 09, 2008 at 05:48 PM
check this link, fashion purses for less most popular handbags suprisely
Posted by: jealpmartina | July 29, 2011 at 09:24 AM