Per page 3 of the Nationwide's May Survey:
Average price October 2007 = £186,044
Average price May 2008 = £173,583
£173,583 ÷ £186,044 = 0.933
1 - 0.933 = 0.067 = 6.7%
6.7% ÷ 7 months x 12 months = 11.5%
RPI inflation = 4.2%
11.5% + 4.2% = 15.7%
Thursday, 29 May 2008
UK real house prices falling at 16% per annum
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4 comments:
A different method, but the same conclusion.
The crash is accelerating, while inflation is increasing. Your 16 percent number is perhaps more contemporary than my 10 percent decline from the peak.
Alice
Your 10 per cent decline is over 7 months, I just scaled it up to an annual rate of 16 per cent!
Hi Mark
I don’t think you can simply add the RPI. You should use it to either inflate last years figure so that it is in today’s terms, or deflate this years figure so that it is last years terms. Either way should give the same answer.
For example - inflating last year’s index: 186044 x 1.042 = 193,858, this is your denominator by which you divide this year’s index: 173,583/193,858 = 0.8954, 1 -0.8954 = 0.1046, scaling this up by 12/7 gives 0.1793 = 17.93%.
Strictly speaking you should also be compounding over 12 months not simply multiplying. You need to add 1 to get 1.1046, raise to the power of 12/7, to give 1.1859, take one away again to give 0.1859 = 18.59%. Compounding the loss allows you to compare directly with what you could have made in cash over the same period. It gives the equivalent of an AER (Annual Effective Rate) that banks quote for their current accounts - i.e. a rate that appears higher as it has included compound interest. Incidentally when they quote loan rates it is usually the nominal rate which is given prominence in any adverts - this is equivalent to what you had calculated by multiplying by 12/7. It will always be lower as it excludes compounding. I wonder why they use the lower one for their loan rates.
Nice try. Let's do this properly.
According to HMRC, overall price increase Oct 07 to May 08 = 3%..
£186.044 plus 3% = £191,625
May 08 actual £173,583 divided by £191,625 = 0.9058
+0.9058^(1/7) = 0.986 (= monthly compound real fall = 1.4%)
+0.986^12 (to annualise) = 0.844
+1-0.844 = 0.156
Hence annualised real fall = 15.6%, which is pretty close to my fag packet 15.7%.
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