Looking back at the past few days of turning point in the data reporting on the housing market a thought crystallized that I’d had for a while. There are just too many housing market indicators in the UK. The press dutifully reports them all on the way up, and will do the same, perhaps with even more vigour, on the way down. Current market levels were justified, as is typical in bubbles, with the argument that “it is different this time” (see earlier post on Bath.) But I wonder if what is truly different (among other things) is the constant reinforcement that the plethora of rising national house price indices has provided. The number has multiplied since the last market collapse, when only the Nationwide and Halifax generated much in the way of column inches. If this has been a contributory factor in the scale of the gains, now the numbers are turning negative it may accelerate and deepen the scale of declines as sentiment gets hammered upwards of six times a month. We know from behavioural studies that it is the frequency of losses or gains not the scale that affects our sentiment and investing judgement. Markets are volatile, so staring once a day at one’s portfolio price on the internet or in the newspaper is a recipe for investment disaster. Look too closely at the data and you see noise, not the drift rate. So the short-run perception of the housing market will be worse than reality and this will further discourage buyers. Who’d want to look stupid by buying? An example of bad maths, or money illusion, call it what you will, appeared in the FT’s Lex column today, where they concluded a review of the housing market by saying that the much touted potential fall of 20% would simply reverse a year of gains. However, as most schoolchildren should know a 20% increase on 100 is 20. But a 20% decline on 120 is 24. House prices locally here in Bath have risen 156% in the past five years. Remove the more recent furious levels of demand, and it must surely be anyone’s guess where the equilibrium level might be. Interesting that studies are coming out trying to delink housing prices from consumer spending. I assume these are to influence sentiment and show that just because house prices are falling does not mean the consumer economy will contract. This suggests a lot of worry in high places. However, I hope they are right.

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