There Is Only One Expert, And Its You.

[laurejon]

Is it any wonder this country is in such a state, and this so called Professor of Economics teaches our Children......................yep you guessed it Economics. The cycle of ignorance is therefore perpetuated.

Dont forget he wrote this in 2002 predicting a crash in 2003 of monumental proportions. He should be sacked.

November 24, 2002

Andrew Oswald, Professor of Economics, Warwick University

www.oswald.co.uk

The Great 2003-2005 Crash in Britain’s

Housing Market

At the end of 1988, I had a chat with my wife. I told her we must sell our

house. Look at these graphs, I said. House prices are going to fall.

Perhaps not surprisingly, as nobody at that point could remember a time

when British house prices had dropped, and she (correctly) was dubious of

economists’ forecasts, she found my logic unimpressive. So she declined to

sell. By the autumn of 1989, our house had lost about 20% of its value, and

there was to be worse to come. Fortunately, we had sold, at that stage,

because I had taken a job with a United States university. This episode,

however, made an impression on family and acquaintances, because my

forecast had seemed to them so implausible.

I think we are about to go through the great housing crash of 2003-2005.

This crash will feel worse, in my opinion, than the one at the end of the

1980s.

I advise you to sell your house, and move into rented accommodation. After

that, put as much money as you dare into the stock market. If that high level

of shares keeps you awake at night, then sell shares down to sleeping point,

and keep the rest in cash.

I am serious. However, in real life it is of course not so easy, and one could

take the view, as with a pension portfolio, that housing will go up and go

down, and that one should just stay fully invested. For some people, that is a

defensible position.

The best indicator of what will happen in the housing market is the ratio of

prices to incomes. In Great Britain, the long-run ratio of the average price of

a home to the average person’s earnings is about 4. In other words, if the

typical Briton gets a wage of approximately 25,000 pounds, then the

sustainable typical house price in this country is around 100,000 pounds.

That sustainable ratio is a bit higher in London and the South East, and a bit

lower elsewhere, but this is the broad-brush number.

Unfortunately, we are now considerably above that. British house prices have

currently reached a ratio of 5 times the average level of earnings.

I believe that house prices will continue to rise about 5% or a little more until

next summer, 2003. Then I expect British house prices to fall by around

30%.

One way to understand this is simply to look at the numbers and to study

history. Another is to use pure logic. Both, however, point to the same

conclusion. Sell now.

As in most markets, when things get over-valued, the decline in prices does

not merely return to long run par value. It overshoots downwards. When

people start selling, they get carried away, and go too far down. The same

happens in the upwards direction, of course. To use jargon, ‘bubbles’

happen on the way up and the way down.

It is useful to look at the stock market, and to compare that with the housing

market. The value of shares is dictated, at bottom, by people’s confidence in

the future. More precisely, the price that traders are willing to pay for a share

like Rolls Royce or LastMinute.Com is fixed by their deep-down views about

the degree of prosperity to come in the British economy. The price of shares

tells us about confidence in the future.

The same has to be true in the housing market. Both shares and homes are

assets. They are valuable because they will be worth something in the

future.

This takes us to an inescapable fact that seems not to have been made in

public debate. It does not make sense for the stock market to be valued

below its long-run trend while housing is valued above its long-run trend.

Because both are assets, that cannot be sustained. It is not an equilibrium,

one might say. Either people are confident about the future, in which case

both houses and shares should be worth a lot, or they are not confident, in

which case the prices of both shares and houses should be low.

The current over-valuation of house prices in our nation is being driven by

low interest rates and a lack of logic by purchasers. Buyers have mistaken

low interest rates as a sign that houses are, in some sense, cheap. But that

is a very serious illusion. Just because my repayments today are lower than

under high inflation and high interest rates does not mean, in a true sense,

that my home is now less expensive. A 40,000 pound BMW is not cheaper in

a world where interest rates are low, nor dearer in a world where interest

rates are high. The price is the price. And it is the same with houses.

Britain’s housing crash will probably come about something like this. In late

Spring of 2003, it will begin to be recognised that house prices have stopped

rising. People will cease being such enthusiastic purchasers. Those who

rushed into buy-to-let properties will begin to sell them. House prices will

crumble, just a little. Then by late summer of 2003, confidence in housing

will go. Prices will crumble more. At that point, newspapers will take up the

cause. Headlines will appear: house prices fell 8% last year.

Panic will then set in.

[Guest Charlie The Tramp]

Come on be fair laurejon how was he to know the BoE would drop IRs mid 2003 to 3.5%, lenders throw the 3.5x rule out of the window, turn a blind eye to self cert, and push IO mortgages, driving the lemmings on a mass buying spree in housing and consumer goods.

Well as we now know things are beginning to turn sour and this debt was not free money after all.

As my good friend John Humphrys said to dear old Gordon " An economy, consumer led, fuelled by debt, on the back of high house prices."

[VacantPossession]

Oswald is still right....but I concede he predicted two or three years early. In his defense he had no idea of the massive scale of spin which has resulted in an immensely powerful influence on confidence, and which I feel is every bit as misplaced as it was when Oswald made the prediction.

For that reason I think the "correction", when it comes (it's already asserting itself) will be all the more marked because there is nothing but naive sentiment and ignorance currently propping up the market by the tiniest thread. When that thread breaks no amount of spin is going to hold a crash at bay.

VP

Edited December 31, 2005 by VacantPossession

[the end is a bit nigher]

Exactly. How many threads have we read on expats and mumsnet etc. with people genuinely bemused by why their pride and joy won't sell when the V.I.s are telling them that it is worth more every day?

[munro]

November 24, 2002

Andrew Oswald, Professor of Economics, Warwick University

www.oswald.co.uk

The Great 2003-2005 Crash in Britain’s

Housing Market

One way to understand this is simply to look at the numbers and to study

history. Another is to use pure logic. Both, however, point to the same

conclusion. Sell now.

As Charlie said. The guy's an academic, he's not in the business of predicting irrational exuberance by speculators who've lost pretty much any grip on the concept of risk, or central banks targetting inflation and thereby distorting the economy further in the speculators' favour, or lenders throwing prudence out the window. Why should he be sacked? If people had listened carefully to his views we wouldn't be in this mess now, with the crash merely postponed and at best a decade of Japanese-style stagnation to look forward to.

[brainclamp]

Teach a parrot to say supply and demand and you've got an economist. -- Thomas Carlyle

Andrew Oswald, ignored this in the face of increasing evidence of (admittedly hidden) mass immigration policies. He was therefore wrong, as I pointed out at the time, and as all the bears were wrong throughout 2003, 2004, 2005 etc...

He ignored the very basis of economics in the face of large volumes of money being printed, thinking inflation would rise as the price of labour rose to compensate workers for increased real living costs, leading to higher interest rates.

However, at the same time, the labour pool was being very aggressively expanded, with skilled worker wages being delibrately undercut even with workers from abroad, and millions added, to the labor pool causing the price of labour to drop. At the same time houseprices rose, again because of this fundemental law of supply and demand.

Now the price of labour has fallen greatly, not, according to the inflation measure of a basket of bread and eggs, but in reality, in real living cost terms - (after tax wages in terms of purchasing power over domestic resources like property and capital).

This also tells you why the BOE is now aggressively lowering interest rates in 2006 as private sector non unionised labour price demands are now so weakened and pathetic, and unemployment is rising because of labour job subsitution and displacement effects, they are falling behind even the measured cost of living.

As productivity has not risen overall, unemployment will rise, and private sector labour demands remain weak. Property prices will rise further out of reach until people realise they are being ripped off, and union membership rises.

As property moves from representing 60% of wealth as per today, to over an incredible 75%, an increasing propertied class will be the only ones with any real equity or command over real resources.

Not just property, but open access to education for the next generation may become a privledge, which is why John Prescott is openly trying to stop Blairs reforms of the general education system, into a streaming system which entrenchs a class system.

Whatever you think about the watered down course-work rubbishy exams that everyone passes with 90% today, in a streaming system, fail an exam at 13 and thats your life chance over for good, as access to higher income jobs and education are closed.

You may be from a poor background with little time to study, but will overcome difficulties later. John Precott failed his 11 plus, but later graduated from Hull Uni at 27, as access to education was still open.

Edited December 31, 2005 by brainclamp

[the end is a bit nigher]

you refer to basic economics - how about

high supply - as per the increase in properties for sale (use rightmove as an example but i could also point you to local EAs)

+

low demand - countrywide and lowest sales for 30 years (plus examples I have posted elsewhere)

=

lower price

simple really

[VacantPossession]

Brainclamp,

I don't know why I am interupting an agreeable glass of bubbly to answer this, but as usual, your obsession that immigration is the root of all evil, and now, apparently, the main reason why Andrew Oswald was "wrong" is really stretching credulity.

I think it has been pointed out to you many times that the NET gain in UK population is actually very modest in the last five years or so, and even without discussing in detail the high likelyhood that such immigration as you are paranoid about, if anything, would result in an increased density not of housing, but the numbers living within one particular house, and therefore would tend to ALLEVIATE housing pressure rather than exascerbating it, you really ought to take a bit of time to seek help for your irrational diatribes which with the best will in the world come across not as comments on economics but a prescriptive message on behalf the BNP.

If you ARE a sympathiser with the BNP then I think it is high time you declared it. All your posts suggest you are.

VP

Edited December 31, 2005 by VacantPossession

[CrashConnoisseur]

Andrew Oswald: 'The Great 2003-2005 Crash in Britain's Housing Market' [November 2002]:

http://www2.warwick.ac.uk/fac/soc/economic...ancynov2002.pdf

By the autumn of 1989, our house had lost about 20% of its value, and there was to be worse to come.

David Smith [Times journalist]: 'Don't get suckered by the house price rally' [November 2005]:

http://www.economicsuk.com/blog/000255.html

Many people believe house prices started to fall sharply from 1989 onwards, precipitating recession. It didn't happen like that. House prices stagnated for a couple of years from mid-1989. They only began to fall sharply when it was clear the economy was in recession and unemployment was climbing sharply. The big fall was over the 1991-93 period.

[jacob]

Brainclamp,

I don't know why I am interupting an agreeable glass of bubbly to answer this, but as usual, your obsession that immigration is the root of all evil, and now, apparently, the main reason why Andrew Oswald was "wrong" is really stretching credulity.

I think it has been pointed out to you many times that the NET gain in UK population is actually very modest in the last five years or so, and even without discussing in detail the high likelyhood that such immigration as you are paranoid about, if anything, would result in an increased density not of housing, but the numbers living within one particular house, and therefore would tend to ALLEVIATE housing pressure rather than exascerbating it, you really ought to take a bit of time to seek help for your irrational diatribes which with the best will in the world come across not as comments on economics but a prescriptive message on behalf the BNP.

If you ARE a sympathiser with the BNP then I think it is high time you declared it. All your posts suggest you are.

VP

I agree with Vacant Possession.

Brainclamp has been keeping on posting comments linking HPI with immigration but has never been able to show convincing evidence.

I start to think that the only reason why he is posting on this site is because he believes that a lot of viewers are frustrated/desperate and can easily be convinced to blame foreigners.

Is Brainclamp trying to recrute voters?

[brainclamp]

Sticks and stones.

For anyone whos interested the University of Bristol/BBC study inidicates the population of the UK rose massively between 91 and 2001 via immigration. The facts are on the webpage.

http://news.bbc.co.uk/1/shared/spl/hi/uk/0...ml/overview.stm

P.S. Its 2006 now.

Edited January 1, 2006 by brainclamp

[VacantPossession]

Sticks and stones.

For anyone whos interested the University of Bristol/BBC study inidicates the population of the UK rose massively between 91 and 2001 via immigration. The facts are on the webpage.

http://news.bbc.co.uk/1/shared/spl/hi/uk/0...ml/overview.stm

P.S. Its 2006 now.

It did NOT rise massively, it rose modestly. The total percentage of people "born abroad" is given as 7.5%, a 3% or so increase on the 1970's. By contrast something like 95% of the whole of the US is populated by people "born abroad". Let's face it brainclamp, you just don't like anyone with a different colour of skin. Why not be honest now and say so.

VP

[Scipio_Africanus]

What about this bit:

'I advise you to sell your house, and move into rented accommodation. After

that, put as much money as you dare into the stock market.'

For an investor early 2003 was perpaps the perfect time to sell your property - provided you didn't put the proceeds in the bank. If you switched into shares you could have seen massive gains over a one year period.

I think this point is so often forgotten by property bulls.

And as far as I can see we're still seeing the stock market outperforming property. I think it could well be the case that further rises in the stock market in the next year contribute to the popping of the property bubble - smart money is going to want to find the best returns.

I know, many people on this board seem to think that non-commodity stocks are doomed, and maybe there will be a generalised crash - perhaps in the Autumn of 2007?