Why booms must always be bigger than slumps
Call it a mathematical trick, but if a bear market is a 20 per cent fall in share prices, a bull market must rise 25 per cent just to get back to where it started.
The latest Halifax statistics show that UK house prices have now fallen by more since the 2007 peak than the 13.1 per cent they fell in the whole property market crash from May 1989 to February 1992. So this housing crash has achieved in 13 months what took nearly four years last time – and this slump isn’t over yet.
By the time prices bottom –perhaps in 2010 – it is likely they will have fallen by 25 per cent. Many forecasters suggest more. Yet a subsequent 25 per cent rise in prices will not return prices back to their 2007 peak levels. They will have to rise by a third – and that will be a boom that makes this slump look small.
This is basic maths but it is frequently forgotten. If a number falls from 100 to 75, that is a 25 per cent decrease: to rise from 75 back to 100 is a 33 per cent increase. The bigger the fall, the even bigger the rise to return to base. A 50 per cent fall requires a 100 per cent increase.
So if shares in a pension fund have slumped by 33 per cent it will require a 50 per cent increase to restore the fund’s value and eliminate the deficit. If the one-third fall was unthinkable, how conceivable is a rise of that scale?
The housing market is key to the fortunes of the whole economy – as many failed to appreciate in the boom years but are realising now that falling house values are undermining both the banking system and consumer confidence.
We should keep the slump in asset values in perspective but we have to have another rise in prices afterwards. It may be controlled, it may be spread over sufficient years to avoid being classed as a boom, but the rise has to be greater than the fall just to make up the ground lost.
