The inflation years

  By Mystic | August 10, 2012 - 05:52 |

Audio -

13:22 min.

Written by: Mystic on August 10, 2012.
Pages: 1 2
Tagged . Bookmark the permalink.
  • http://www.alda-architects.co.uk/ Alan

    That chart is well out of date in finishes at the end of 2007 at the start of the falls. The first house I bought in1975 cost £17,500. A very similar house was recently sold for £125,000 . (May well be less as that was the asking price) Now according to this site http://www.thisismoney.co.uk/money/bills/article-1633409/Historic-inflation-calculator-value-money-changed-1900.html what I paid is now worth around £140,000 in real terms.

    Wonder if they are comparing the average house then and now? For if they are it is not like for like. There were a fair number of very small Victorian terrace houses, and back to back, houses around in 1970. There were also the post war prefabs. The new houses were not insulated, wiring and heating more basic and I doubt if there was any broad band connections, solar panels, heat pumps, double glazing etc. 

    I can never quite understand why houses hold value, perhaps they aren’t really like a car. You can live without a car, but hard to do (in this climate) without a roof over your head. It is a necessity and you maintain it in working condition, or most do. I suppose you could live in a caravan, and they don’t hold their value.

    Why can’t we build houses cheaper? Well for a start the Planning System restricts availability of land (rightly or wrongly). Also ever tried to get Planning Permission for an industrialised pod for somewhere in the Cotswolds?

    Perhaps there is a housing shortage in many countries?

    If you think about it; it is very difficult to standardise housing, shape of sites, ground conditions, general topography. They had a good go at it in the 60s, tried to do it on the cheap and we now have the problems. There is a lot to recommend, concrete blocks, timber and insitu concrete. Very flexible and fairly cheap. When you try to industrialise major components well there is a trade off. Also if you consider the life span of a traditional house against that of some of the more novel forms of construction then there is a cost over life span consideration.

  • John_by_the_creek

    Dear Mr. Mystic:
     
    I’m more than a bit surprised that the US fell-out in the lower section of the chart.  It would have been nice to have seen a chart like this, with an even longer time frame; say one hundred years.  I’m wondering if maybe the post war period may not be skewing the European data.  I’m guessing that European house prices may have been suppressed for a few decades after the war, as the Euro economies recovered, then resulting in what appears to be a dramatic surge from the 1970′s onward.
     
    Here is a link to a chart showing 100 years of US house prices:
    http://observationsandnotes.blogspot.com/2011/06/us-housing-prices-since-1900.html
     
    The post war years in the US saw the advent of the GI bill (http://en.wikipedia.org/wiki/G.I._Bill) which provided access to “zero down” mortgage credit (backed by the government), and house construction/ marketing as never seen before (http://en.wikipedia.org/wiki/Levittown,_New_York). 
    I think you are correct in saying there is no reason to view a house as an “investment” (although it is probably a decent inflation hedge).  But like so many other “consumer goods”, it’s the marketing campaign that determines demand (the “modern” public has little perspective of, or interest in ”history”).  Toss-in a flood of available credit to the masses, and the baby-boomer motto of “I deserve it”, and it’s easy to understand how we got here.  I read a while ago that house prices pretty much track the overall inflation rate in the long term.  At current prices, this suggests that either they could fall more, or stay flat for a very long time.
     
    Regarding your comment to the effect that “house prices should be falling with the advent of new building techniques and technologies”), in a way they have been here in the US.  Manufactured housing (AKA - pre-fabs, factory built, mobile homes, house trailers, etc.) have made incredible advancements in the last 40 years.  Many are “cheap” to buy, are spacious, and offer fantastic energy efficiency.  But they suffer from two problems.  They are not as “aesthetically pleasing” as a traditional home, thus the “upwardly mobile” crowd view them with contempt.  And because they are generally viewed as “shelter for the less affluent”, many municipalities prohibit them via draconian zoning laws (they would depress property values in the neighborhood).  Lip service is always given to “helping the poor”. But when push comes to shove, “just not in my back yard”.
     
    It was all a very nice “anomaly” for several generations, but reality always reconnects with silly perceptions.  The “cheap energy” anomaly has lasted for six or seven generations, and that too appears to be coming to an end.  If the masses are grumpy about falling house prices, just wait till they are faced with “rolling-back” their entire lifestyle.  I’m guessing all forms of tranquillizers and anti-depressants will soon become over-the-counter medications.

    • http://overthepeak.com/wordpress/ Mystic

       For some reason I loved, `shelter for the less affluent`.  It kinda summed up the modern art of not calling something something it is.  I can just see some well meaning young lady talking to someone who immediately translates it in his head as `cheap house` and looks at her as though she was from the moon. 

      I did a single long shot on this to show the weakness of the people in the face of what we could call lots of things, but `advertising` will do here.  (meme changing)  The whole mental perception of `what a house is` was changed by people who would profit from that change.

      It is a big sticky-out example of the power of advertising …… and how we, as a people, are completely taken over by it.
      It takes basically born-stubborn contrarians to resist.

      This is why we are now, not people, but consumers.                              (hello John)

      • axionication1

        Jumping in. You appear to be entering the meme on ‘meme changing’.
        I like that direction & wish you would explore it more.

        The credit needed to be utilised in order to be…well…credit.

      • John_by_the_creek

        The euphemisms do become absurd, but for some reason, a large portion of the public seem to take comfort in them!  Is an ”STD” and less bothersome than “VD”? 
         
        Yes, yes, on the “consumer” thing!  But as the froth of the credit meringue deflates, I’m guessing more and more people will become cognisant of the other aspects of their existence.

  • CSArichardo

    I think if you are a company in Canada (incorporated or not) you can depreciate a building at 4% per year.  A car at 30% per year.  Because of the low depreciation rate on a building it really makes the comparison our Mystic is making difficult for the average Joe to visualize but in the big picture he is absolutely correct !   Your home should be declining 4% per year unless you are putting at least that into upgrades.  Clearly some type of Ponzi scheme going on.

    http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/dprcbl-eng.html

  • Guest

    House buying is a funny subject. It seems, although I largely ignored them, there’s a whole new set of rules that people apply when folks are house hunting and most of them are related to how good an “investment” a property is. I understand that for most folks buying a property is likely to be the biggest purchase they make and is a serious matter, but when did folks stop asking themselves if they could be happy living in a particular house and start asking how good of an investment it is? I’ve never looked at my house as an investment and do not care what it’s resale value is.

    • Guest

      Also, more on-topic, does the increase in the size of properties over the past 40 years factor in to the price rises at all? I hear that in the US the size of the average home has pretty much doubled. Although that trend is also reversing.

      http://www.npr.org/templates/story/story.php?storyId=5525283

      • http://overthepeak.com/wordpress/ Mystic

         I’m sure the rise in the sizes of houses is (or at least should be) factored in there somewhere.
        But, even if it isn’t, as you say, we all know that the reasons for by a house seem to have changed.

        I put this in here to link it to the bankers (and as to Johnny above, advertising).
        Just like people change their cars, or any of all sorts of unnecessary spending, it `could be` put down to manipulation by `business`.
        They do it.
        Banks have done it.
        We can say that everyone has been a winner, because all sorts of wonderful things have been bought by the people (and it has made them ever so happy~?).
        GDP has zinged along.

        I’m sure it would have gone on forever if it it could.  Everyone and everything getting bigger and better ………….. but, there seems to be some `reality` getting in the way.
        Strange that~!
        (and such a shame~!!)

        • http://www.alda-architects.co.uk/ Alan

           I think you are well off mark on this one, does the average person really consider their home as an investment portfolio? A few deluded souls perhaps, but I think consideration of local schools, safe garden for children and journeys to work are more important. In most the nesting instinct is stronger than the desire to build empires.

          Most see renting as a poor alternative that lacks security and limits what they can do, own cats, alter, extend. People seek security.

          I am sitting in a Victorian house and in my opinion this house is better able to service the needs of those living in it now than the day it was built. The sloppy aspects of Victorian construction have been made good, no iffy damp proofing, proper sealed windows, no draughty, rotten timber ground floors or multiple fire places. It even has plumbing that works and electrical wiring. People repair their houses and invest in them, the basic structure lasts, that is why they hold value. There is no reason why this house could not be lived in 300 years from now.

          If you want houses that do depreciate like other consumer goods then you need to look at temporary structures, or the likes of caravans. These are difficult to maintain long term. They fit in with the consumerist model.

  • Nic

    Really People five comments?

  • TheModernMystic

    I am sooo tired of busting my ass every day searching the interwebs for fresh stuff just to have a bunch of trolls come on here, steal my stuff without commenting and rush down to the bars to pretend they are smart to pick up young women. It is coming to an end people.

  • safeinsuburbia

    What you are saying is in line with Denninger.  He said historic prices were 3 to 5 times income.  Now it’s around 7 or 8.  Thanks to the easy credit.  Going to be hair-raising the decline and possible overshoot to the downside.  Unless, somehow, this is a “new normal”.  Last I checked, gravity works the same.

    • http://www.alda-architects.co.uk/ Alan

       Where I am the average house costs £98,000 when last I looked, seems about right if not on the low side of 3-5 times income.

      Also back in 60s -70s food and many goods where a lot more expensive in real terms than they are today.

      • Anne Panne

        This is a chart over the  change in the distribution of expenses in Norwegian households from ’58 to ’09: The red one is housing, the darkest blue is food and transportation lightest blue.
        Note that the housing costs were lowest in ’73.

        • http://overthepeak.com/wordpress/ Mystic

           Was it this one you wanted~?
          (When it is up on the website, you cursor over it and if cursor turns to hand, then click….It should open on new page, then it can be `right mouse clicked`, `saved as` to your computer ……. and then here `+Image` will ask where to get the image from). 

          ((very sorry if you know all this, but something else went wrong~!)).

        • http://www.alda-architects.co.uk/ Alan

           Interesting graph as is the maps below it on the link. I believe that housing includes water, electricity, oil, gas and other fuel.

  • http://www.alda-architects.co.uk/ Alan

    I should mention a few another reasons why it is difficult to reduce the cost of new buildings.

    Legislation, some good and some adding a whole unproductive layer of administration. Certificitates and form filling. Daft policies written by people who have not the slightest idea of what they are doing. They have created an utter mess, a labyrinth. Needs to be simplifies and that would result in large savings. 

    Government bodies related to building that are ‘self financing’, ie they pass on the cost of their inefficiencies to the construction industry and also act as a drag on production.

    Monopoly, private sector, service providers. What some charge would make a banker blush.

  • Emmazedbend

    Excellent presentation I have been thinking about this quite a bit recently, I am in charge of my Mothers affairs and will need to sell her house when the time comes and I’m worried the bubble will have burst by that time (next 2-4 years). I asked the neighbours opinion as to whether I should get the garden ‘done’ he said don’t bother it won’t add ‘value’ to the house, but perversely putting a few licks of paint around the place will.
    I saw a documentary about the 70s and even in the early 70s in some parts a house price spiral was starting to happen – among the Middle Classes in certain areas, buying up run down (formerly grand) town houses.
    It all seems to coincide with the departure of manufacturing and the availability of more credit; could some one have sat in a room and planned it all? or was it organic?

    • http://overthepeak.com/wordpress/ Mystic

       You have it with  “…….and the availability of more credit”.

      After WWII, Bretton Woods was the thing.  It included very restricted capital (money) restrictions.  After US did a gold window slam down, everything changed …. capital restrictions were lifted and money started flying about.

      What happens when you `free` people from restrictions~?
      (yup, they go a bit over-the-top~!)

      Money is `good` that can be sold to people like beans.  So, the free people sold that money like beans. 
      Everybody was hippy happy~!
      ~?~

    • ModernMystic

      So what exactly are you saying???

  • ModernMystic

    More Comments People!!!!!!

    Let’s keep talking

  • Camilo

    The  presentation is good  and it has his point, but it’s not easy for me to see houses just like a liability. You can live without a car and by a fraction of the price of buying ( + maintenance + insurance) travel in public transportation lets say 300 vs 50 per month. The same does not apply to the house, every month you are forced to pay to live in a house and the price of renting or buying is very similar (20%), and the result at the end of 20 or 30 years is very different because if you were buying you own the place and your monthly costs are considerably reduced even considering the maintenance.
    After retirement it’s very good to own a place as we assume that due to the reduced costs you will live better.
    This chart is not taking into account other factors that can “justify” the current price of the house. In the case of Spain in the 70 we were in a dictatorial state and the country’s  economy was very different for what it is today. I would say that Spain did not fully benefited from the boom that France or Germany had since the end of WW2, it was on a different plateau.

    • http://overthepeak.com/wordpress/ Mystic

       Spain still is on a different plateau (as you are now finding out).

      • Camilo

        You’re right the economy in spain is nowhere near from Germany, we still need to check if we are at the 90 level or somewhere near 300 relatively speaking ( as the graph works in % terms).
        Just for extra information today is possible to buy some properties in Madrid for around 100 k€, that gives a monthly mortgage around 400 euros over 30 years, and if we want to rent it the price is around 550-650 euros. The big problem that the banks and constructions companies have is with the properties that were built in some small villages around Madrid that were supposed to cost 300-500 k€ and no one wants now….maybe when they will cost 50k€ they will sell them (and be broken).

        • http://overthepeak.com/wordpress/ Mystic

           Yes, countries capital cities will all be somewhat protected from the house price destruction.
          (or other real centres of capital inflows).

          Pull the village ones down and fill a big valley with the used concrete.

          It all seemed like a wonderful thing at the time, eh~!?

  • Tekkie

    A house is not a car, bad comparison there. People need a space to live, they don’t need a car. What drives a house price… not the house like Mystic says, its for the most part, the land it sits on. In this way of thinking, houses will always go up (or at least over a said period of time) as the demand for a need (the house/housing, not a damn car???) will go up with population. I wonder how the price of a house has risen in regard to population in the uk???

    Come on mystic, you can do better than this twaddle.