Sunday, March 29, 2009

Do you think there might be a connection?

What determines house prices? Demographics, immigration, a lack of land, or planning restrictions? The chart above tracks the money supply (M4) and house prices from 1963-2008. They do seem to move together.

For those who have dabbled in statistics, the correlation is 0.97.


  1. Very interesting Alice. Hardly a surprise for those who have followed the effects of the house price bubble.

    There was a talk show discussion on on the impact of second homes, the key argument that was missed was the leverage these buyers had over locals because the bubble and their existing home ownership allowed them access to more credit, so helping them to pay more and thus price out locals.

    BTW it might be useful for you to include a short definition of M4 for those who stumble across your site.

    Also, can you update your header graph to include the HP decline in recent months.


  2. This is true because banks create money not the government. Money is basically created by banks when they loan. The link that I give is quite long but it explains the process in detail.

  3. So if M4 continues to ramp up, house prices will rise again?

    How about adjusting both lines for inflation (CPI), or NAEI?

  4. Yes, there has been a strong correlation between housing prices and money supply, whilst banks are lending money. The real correlation is presumably between mortgage availablity and housing prices.
    However, at the moment the banks are reluctant to lend, so presumably the correlation is teporarily suspended.
    Did I miss something?
    Housing Bear

  5. As Chris says.
    The two are the same thing. M4 measures credit money. Ignore all that nonsense about fractional reserve etc, and base money being the driver.
    Money is endogenously created, and nearly 100% is just debt.

  6. isnt that primarily the inflationary expansion curve though?

  7. Banks allocate the money, but regulators decide on the volume of credit via reserve requirements.

  8. The pink line is growing exponentially and is almost vertical now.

    Something very bad is about to happen.

  9. t

    you are right; it is time to dump the chart on the banner. I would love to update the site; but I am a limited when it comes to html.

    M4 is defined as:

    1 - Sterling notes and coin held by the non-bank private sector

    2 - Sterling deposits of the private sector with UK banks

    3 - Sterling short-term paper and securities, with an original maturity of up to and including five years, issued by UK banks and held by the private sector.

    It is a broad measure of money. BTW, building societies are also included as banks.


  10. While it is entirely plausible that money supply causes house price inflation your mathematics is appalling. The graph only shows that both are exponential it does not show that they are correlated. To show that you should show that house price crashes are preceded by monetary contractions.

  11. Is money supply and credit supply the same thing ?

    I think we're finding out that it's not.

  12. Anonymous,

    Thanks for the comment, but no, I don't need to show that. I was making a very simple point that over a very long period (1963-2009), there appeared to be a correlation between monetary growth (essentially credit) and house prices. Expectations, fear, stupidity all play their part in housing crashes.

    In fact, my post offered no explanation about housing crashes.

    As for my maths, I made no claims about that either.

    Again, I appreciated your comment. There is no such thing as a bad one.


  13. Money supply used to create prosperity but now there is no apetite for creating things anymore because China make them all.

    OK so how would make the banks their money?

  14. Money fired up the housing bubble - the simple unvarnished truth.

  15. Those talking about reserve requirements: the UK now runs on the Basel II accords and has no percentage reserve requirement. The banks are instead supposed to keep enough capital to cover their supposed risk.

    Their risk assessment has been shockingly weak, which is why they basically shut down at the end of last year. A very small run was enough to completely upset most of the banks.

    A reserve ratio of 0 allows banks to infinitely expand the money supply, and because the more they lend, the more profit they make, they lent without restraint, resulting in the biggest bubble of all assets ever seen.

  16. Kruador,

    And the pink line looks like it's going ballistic.

    Basically regulators decided that infinite credit was good.

  17. Looks to me it went from zero to about 110 in 34 years between 63-97 and then from 110 to 390 in 12 years.

    Or 3.25 per year vs 32.5, or they opened the gates 10 fold versus the previous years.

  18. M4 is defined in a totally bizarre way. A big problem is, as I understand it, that loans with a maturity > 5 years don't count towards M4. This means that if the mood for loans shifts from long term debt to short term debt, the money supply increases, without any actual corresponding in the amount of debt.

    This is just one of several problems with M4. As far as I can tell, M4 figures are about as reliable as CPI and RPI figures, which is to say they are not reliable at all.

  19. You are missing the big picture: debt is the key. While many people do not consider their homes debt, that is what it is. It is not an investment, or a pension: it is just debt. And UK homes are not so much more desirable than homes in Germany, or France or other developed countries. What singles the UK out is how easily people allow themselves to be enslaved by the bank's debt/house economy. Once snarred, Brits then pump vast amounts of their money into the mortgages on over-valued homes. This money then ends up in the bank's coffers, who then lend and invest it internationally, to their own profit (not the homeowners). The UK is only interesting as a place because it has a population so ill-informed they can be looted for their wealth to finance global investment projects. Look at the big picture.