Tuesday 29 April 2014

The UK: a house price based economy with a house price based currency.

The first chart is house prices adjusted for inflation since Q1 2004 from Nationwide. The second is the British Pound (GBP) averaged out against other major currencies (6-month moving average) since 1 Jan 2004. Surprisingly similar.


Steven_L said...

Why's it surprising?

What does UK GDP in USD look like?

Mark Wadsworth said...

SL, well, knee jerk expectation would be that house prices do the opposite of GBP.

For example: high interest rates = good for GBP, bad for house prices.

But experience tells us that the two move in line... because we are a house-price based economy. Nothing else matters any more, not government deficits, trade deficits, unemployment, interest rates, anything.

Lola said...

Well, if you trash the currency by the unwarranted expansion of money and credit, those graphs aren't so surprising.

Mark Wadsworth said...

L, well no exactly not.

If you "trash the currency" by expanding credit/reducing interest rates, you would expect house prices to go UP but the currency to go DOWN. But the two move in tandem.

Dinero said...

Interesting correlation.

Do we have a land backed currency.

Well from the logic of accounting the curreny is backed by borrowers wages and collateralised by house/land values. So what does a chart of wages over the same period look like. I checked, looks like house prices could be the better fit.

Mark Wadsworth said...

Din, good work, can you establish any correlation at all between wages and GBP or wages and house prices? Probably not much.

Dinero said...

Wages were simillar but with a couple of small extra peaks/troughs but
where is the best source on these kind of stats.


How to make some money on this correlation.

Dinero said...

A land backed currency is not an entirely new idea.


According to that correlation of the charts it is not a good idea to get a mortgage in a foreign currency and why IVG with the Gherkin went bust. http://markwadsworth.blogspot.co.uk/2014/04/adverse-interest-rate-movements.html

Mark Wadsworth said...

D, the two move in line, so by borrowing in foreign currency you double your profits but double your losses.

(Sensible hedging says always borrow in the same currency as where you 'invest' and preferably from a bank in that country.

The big oil companies do this apparently, so if they have oil wells in a country where a new government nationalises everything, they can just walk away, they lose the oil wells but don't need to bother paying the bank debt either.)