October 1987 revisited

I'm trying to work out whether making an historical analogy with 20 years ago is valid.

Let's have a look at what has happened to prices. Cliff D'Arcy in The Motley Fool (22 May 2007) does a very informative comparison between houses and the FTSE 100. He reminds us that although the FTSE-100 dropped dramatically on "Black Monday" (19 October 1987), it ended about 2% higher over the year as a whole. If we take his figures for 1987 to 2006, house prices increased 287%, and the FTSE 263%. This would suggest that house prices and stock prices have increased about equally (though houses cost money to run, whereas shares pay dividends).

Are British people over-borrowed? This Bank of England research document from September 2004 says not, in relation to house prices. Yes, debt-to-income has gone up, but interest rates are now low. And despite its name, the latest survey from UK site HousePriceCrash indicates a general belief that house prices will continue to rise in the months ahead. (But recent first-time buyers will be more vulnerable, having little equity and probably a high income multiple for their loan.)

I find the monetarist arguments intuitively persuasive, but I'm puzzled by the disparity between prices and monetary inflation. Using the UK's M4 stats, over the 78 quarters from Dec 1987 to March 2007, the average annualized increase in the money supply is about 10.48%. Compounding that figure, we get about 7 times more borrowed money in the system today than in 1987. Yet houses and shares are only 3-4 times higher.

What does seem clear is that we have borrowed more in relation to income, and this makes it even more important not to lose your job, or be hit by high interest rates. It's worrying when you have to depend on things carrying on as they are, indefinitely.