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Housing Pessimists Wrong But Have Their Uses

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Here's the link, but i'm not subscribed to ft.com, so anyone who's got the full story, please post:-

Housing pessimists wrong but have their uses

https://registration.ft.com/registration/ba...20abe49a01.html

Bubble? What bubble? The last Economic Outlook from the Organisation for Economic Co-operation and Development argues that UK house prices are overvalued by 30 per cent, or even more. It also warns of the danger of a protracted period of house price falls, with dire implications for consumer spending. The OECD is not alone. But these pessimists are wrong.

If there were a bubble, there would exist a systematic, albeit temporary, deviation of prices from fundamentals. Our research shows, instead, that fundamentals adequately explain the current level of house prices.........

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I thought that language sounded strangely familiar – ah, got it!

The UK House Price Bubble Illusion [surely not debunking a myth ;) ]

Gavin Cameron, John Muellbauer and Antony Murphy

FT Article March 2006

Link: http://www.nuff.ox.ac.uk/users/murphya/Bubbles.pdf

Was there a British House Price Bubble? Evidence from a Regional Panel.

Gavin Cameron, John Muellbauer and Antony Murphy

Link: http://www.nuff.ox.ac.uk/users/murphya/Was...0mar%202006.pdf

This is areal authentic bull argument, so why not add it our new "myths" section ...

Edited by spline

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What about attempting a systematic demolition of the position followed by a HPC press release? Shouldn’t be too difficult, especially as at first sight their data runs out only to 2003, and as we know there was no bubble before then because it developed afterwards, so perhaps we could expose it as a straw man fallacy. Just need to add the actual prices from 2003 onwards to the figures on page 40 and demonstrate a significant divergence from the predictions to clinch it! :)

Edited to add: they seem to be predicting about 1-3% YoY for 2005 depending on region, out from a baseline in 2003, which seems reasonable - the good scenario doubles this by 2009, the gloomy one dips slightly negative YoY during 2006/07 then recovers. There could be evidence of a bubble in the divergence *up* during 2003/04 if we also find a divergence *down* during the next few years - so can't say either way until it's happened.

Edited by spline

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Bubble? What bubble? The last Economic Outlook from the Organisation for Economic Co-operation and Development argues that UK house prices are overvalued by 30 per cent, or even more. It also warns of the danger of a protracted period of house price falls, with dire implications for consumer spending. The OECD is not alone. But these pessimists are wrong.

ADVERTISEMENT

If there were a bubble, there would exist a systematic, albeit temporary, deviation of prices from fundamentals. Our research shows, instead, that fundamentals adequately explain the current level of house prices.

Like many others, the OECD appears to base its conclusions on two pieces of unreliable evidence. One is the ratio of house prices to rents. The second is an equation estimated by the International Monetary Fund in which housing supply, the population’s changing age structure, shifts in UK credit conditions and nominal interest rates play no role. It is hardly surprising that this equation turns out to be useless.

In our research, however, we do take these and other factors into account. We also model prices at the regional level. The great advantage of the latter is that it generates more precise estimates and more robust conclusions.

Our econometric model satisfactorily explains price fluctuations from 1972 to 2003. It captures the effects of income, the size and age composition of the population, the housing stock and interest rates. It also builds in the effect of recent house price growth, including transmission from leading regions to others. We distinguish between short-run and long-run effects of house-building and population growth. We allow for the effects of stock markets and for differences between regions. We also examine the effect of today’s easier credit conditions. These not only have a direct effect on real prices, but also change the relative importance of real and nominal interest rates: the former become more important and the latter less so. If we estimate our model for data up to 1996 and forecast the subsequent period, we generate predictions that are in line with the rapid price rises that happened. Our conclusion is that we can readily explain the evolution of prices in this recent period by lower interest rates, higher real incomes per household, higher population growth (partly from immigration) and low rates of house-building.

If we compare what actually happened with what our model says would have occurred, we can state for example that house prices would have been 25 per cent lower in 2003 if real incomes per household had stagnated between 1998 and 2003. For 1988-99, however, now almost ancient history, we do find some symptoms of a policy-induced bubble.

We also examined house price developments for 2004-10 on a range of assumptions about possible developments in income, population, house-building, inflation and interest rates. We find that only quite dismal scenarios – more dismal than any now contemplated by mainstream forecasters – would produce falls in nominal house prices and, even then, these would be small. London and the south are the regions where such scenarios would have the largest effects.

If we assume just a mild slowdown in the economy for a couple of years, which is more pessimistic than today’s consensus, house prices still rise in nominal terms. The figures for 2006 would be about a 3 per cent rise for London and 5 per cent overall. If we assume a gloomy scenario, in which inflation rises, interest rates increase by 1.5 percentage points, real per capita income does not grow and the stock market stagnates before resuming growth in 2008, house prices in London and the south decline by about 1 per cent in 2006 and 2007. Needless to say, still gloomier, though less probable, scenarios can produce national house price declines. The risks may be low, but they are not zero.

Since cash from property investment trusts will be injected into the market in 2006 and the stock market has also been so strong, the deterioration in housing affordability is likely to ­continue.

The believers in the bubble were wrong. They are still wrong. But, paradoxically, their alarmism may have helped to prevent the bubble they fear from developing. It has not, or at least not yet.

Gavin Cameron is at Lady Margaret Hall, Oxford. John Muellbauer and Anthony Murphy are at Nuffield College, Oxford. Full article at www.housingoutlook.co.uk

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Very clever people, who have spent the last 8 years buying up property in a massive self propelled song and dance BTL party because they know the true meaning of everything.....

Maybe not ??? Maybe just trying to work out what the f*ck happened to sensible borrowing ????

Maybe they are right, maybe they are wrong.......

Rather be debt free now and decide in a couple of years, thank you very much.

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Another one to remember...

I'll be noting a few of these down. When the correction is finally over, I think I might become one of those "no win no fee" lawyers the chavs always seem to use to sue the local council when they trip up on a paving slap after drinking too much Stella... :lol:

This is going to make the endowment free for seem like the vicar's garden party..

;)

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IMHO it's not enough to dismiss this paper as NCYMNCE. It's clearly a serious piece of research and a model for house prices that has a face validity.

BUT something smells wrong about a model that says IR at 6.5% in 2006 and 6% in 2007 would have no effect on house prices.

Maybe there is a problem with some of their other assumptions. You can find these at the foot of Table 4. They include this satement:

"The index of credit conditions CCI is asumed unchanged."

I don't know for certain what this means but there is a comprehensive explanation of the CCI here:

http://www.iue.it/FinConsEU/ResearchActivi.../Muellbauer.pdf

"Consumer Credit Conditions in the U.K. by Emilio Fernandez-Corugedo and John Muellbauer" (the very same?)

It would be interesting to hear what others more versed than I in econometrics make of it.

However, the index is explained in these terms:

"We have estimated an index of credit supply conditions facing households in the 1976-2001

period. The index was derived as a common factor in ten credit indicators subject to broad priors,

consistent with the historical account of financial deregulation and other developments outlined

in Section 2. Two of the ten credit indicators are aggregate unsecured debt and mortgages

(secured debt). The remaining eight consist of the fractions of high loan-to-income ratio and high

loan-to-value ratio mortgages for U.K. first-time house buyers split by age and regions."

My first impression, which may be wrong, is that this refers to the ease of getting credit. If so their predictions on house prices seem to rest on a continuation of the easy credit regime of the last years. How likely is that?

Edited by New Bear

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Bubble? What bubble? The last Economic Outlook from the Organisation for Economic Co-operation and Development argues that UK house prices are overvalued by 30 per cent, or even more. It also warns of the danger of a protracted period of house price falls, with dire implications for consumer spending. The OECD is not alone. But these pessimists are wrong.

ADVERTISEMENT

If there were a bubble, there would exist a systematic, albeit temporary, deviation of prices from fundamentals. Our research shows, instead, that fundamentals adequately explain the current level of house prices.

Like many others, the OECD appears to base its conclusions on two pieces of unreliable evidence. One is the ratio of house prices to rents. The second is an equation estimated by the International Monetary Fund in which housing supply, the population’s changing age structure, shifts in UK credit conditions and nominal interest rates play no role. It is hardly surprising that this equation turns out to be useless.

In our research, however, we do take these and other factors into account. We also model prices at the regional level. The great advantage of the latter is that it generates more precise estimates and more robust conclusions.

Our econometric model satisfactorily explains price fluctuations from 1972 to 2003. It captures the effects of income, the size and age composition of the population, the housing stock and interest rates. It also builds in the effect of recent house price growth, including transmission from leading regions to others. We distinguish between short-run and long-run effects of house-building and population growth. We allow for the effects of stock markets and for differences between regions. We also examine the effect of today’s easier credit conditions. These not only have a direct effect on real prices, but also change the relative importance of real and nominal interest rates: the former become more important and the latter less so. If we estimate our model for data up to 1996 and forecast the subsequent period, we generate predictions that are in line with the rapid price rises that happened. Our conclusion is that we can readily explain the evolution of prices in this recent period by lower interest rates, higher real incomes per household, higher population growth (partly from immigration) and low rates of house-building.

If we compare what actually happened with what our model says would have occurred, we can state for example that house prices would have been 25 per cent lower in 2003 if real incomes per household had stagnated between 1998 and 2003. For 1988-99, however, now almost ancient history, we do find some symptoms of a policy-induced bubble.

We also examined house price developments for 2004-10 on a range of assumptions about possible developments in income, population, house-building, inflation and interest rates. We find that only quite dismal scenarios – more dismal than any now contemplated by mainstream forecasters – would produce falls in nominal house prices and, even then, these would be small. London and the south are the regions where such scenarios would have the largest effects.

If we assume just a mild slowdown in the economy for a couple of years, which is more pessimistic than today’s consensus, house prices still rise in nominal terms. The figures for 2006 would be about a 3 per cent rise for London and 5 per cent overall. If we assume a gloomy scenario, in which inflation rises, interest rates increase by 1.5 percentage points, real per capita income does not grow and the stock market stagnates before resuming growth in 2008, house prices in London and the south decline by about 1 per cent in 2006 and 2007. Needless to say, still gloomier, though less probable, scenarios can produce national house price declines. The risks may be low, but they are not zero.

Since cash from property investment trusts will be injected into the market in 2006 and the stock market has also been so strong, the deterioration in housing affordability is likely to ­continue.

The believers in the bubble were wrong. They are still wrong. But, paradoxically, their alarmism may have helped to prevent the bubble they fear from developing. It has not, or at least not yet.

Gavin Cameron is at Lady Margaret Hall, Oxford. John Muellbauer and Anthony Murphy are at Nuffield College, Oxford. Full article at www.housingoutlook.co.uk

Hmmm, a very different analysis to that offered by another Oxford economist, Andrew Farlow. Farlow's model/thesis, that the present high prices for property is down to easy credit and psychological factors, is much better argued, IMO, but then I'm a bear I suppose.

The major problem with this model, is that it hasn't been tested, i.e. anyone come up with some stats based on one set of data, and show that the model "predicts" the data - it won't of course, it will merely describe it.

The model outlined by Cameron, Muellbauer and Murphy describes only the last 30 years, the last 10 of which have consisted solely of house price inflation. In all the model concerns only 2.5 cycles by my count, where one quite important cycle (i.e. the present one) is far from finished.

They really need to see how the model fits data from other countries. I doubt it will, but hey.

Just out of interest, who funded them to come up with this work?

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Hmmm, a very different analysis to that offered by another Oxford economist, Andrew Farlow. Farlow's model/thesis, that the present high prices for property is down to easy credit and psychological factors, is much better argued, IMO, but then I'm a bear I suppose.

The major problem with this model, is that it hasn't been tested, i.e. anyone come up with some stats based on one set of data, and show that the model "predicts" the data - it won't of course, it will merely describe it.

The model outlined by Cameron, Muellbauer and Murphy describes only the last 30 years, the last 10 of which have consisted solely of house price inflation. In all the model concerns only 2.5 cycles by my count, where one quite important cycle (i.e. the present one) is far from finished.

They really need to see how the model fits data from other countries. I doubt it will, but hey.

Just out of interest, who funded them to come up with this work?

It seems to be funded by a combination of the ODPM and the ESRC:

"This paper draws on research carried out for a project (“Affordability Targets: Implications for

Housing Supply”) funded by the Office of the Deputy Prime Minister (www.odpm.gov.uk). Support

from the ESRC under grant RES-000-23-0244 ‘Improving Methods for Macro-econometric Modelling’

is acknowledged."

But shouldn't it be their argument rather their funding that is attacked? (And the ESRC is the closest a researcher can get to funding without strings).

But Rich, I think you may be right about alternative models that focus on the ease of getting credit. If I'm right in my suspicion that they are assuming that the easy credit regime will continue and, under those conditions, they predict no decline of house prices, this might indicate that the "trigger" to the crash, if there is one, will be from tightening of the credit environment. I wonder what their predictions would look like if they did not assume stability in the CCI but factored in tightening of access to credit?

Edited by New Bear

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Don't like using the "vested interest" card, but...

http://www.housingoutlook.co.uk/Papers/jdw.pdf

Professor John Muellbauer

Official Fellow of Nuffield College and Professor of Economics, Oxford

University

Professor Muellbauer is regarded as one of the leading housing economists

in the country. He has contributed extensively to the debate over property

taxation and also to the argument as to whether the UK should join the Euro.

Current areas of research include modelling regional housing and labour

markets in the UK, monetary transmission and policy, consumer behaviour,

the South African economy and forecasting growth in the G7 countries.

He is co-founder of the website www.housingoutlook.co.uk

If you require any further information please contact James Wyatt at John D

Wood & Co., 7 Kensington Mall, London W8 4EB or on 020 7908 1102 or

via email jwyatt@johndwood.co.uk

For a market update please contact your local John D Wood & Co. office

www.johndwood.co.uk

But what is johndwood.co.uk? I expect it's a well-funded pressure group trying to get housing for FTBs...

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The first link given above results in a very simple paper (abstract) referring to a model they produced that they claim predicts no crash. It gives no details of the model and no references.

If you hunt around on Anthony Murphy's page, then you can find a link to a powerpoint presentation that gives more details. There are hooks for references but no references themselves. The main paper the presentation was presumably meant to accompany doesn't seem to download. When I'm at work and have access to windows computers with IE I might be able to download it. But several attempts using several methods here failed.

But there is a very interesting graph in the powerpoint presentation. It shows mortgage payments as a percentage of take home pay. As in previous graphs we've seen here lately, the current value is nothing compared to the 1991 peak when interest rates went high. But, there is an additional line on the graph for "recent borrowers" (or similar language). This line does go up considerably during the current boom, and is now roughly comparable to the peak for new borrowers during the last boom/bust circa 1991. This, I think, is very interesting as it contradicts claims made in this forum recently that affordability is much better now than it was at the peak of the 1991 boom, and shows why this is the case. Last time with high interest rates, everyone paying a mortgage was hit. This time with low interest rates, it's only the FTBs paying very high prices that are stretched, and their pain (mortgages taking up a large amount of take home pain) can't be seen if we take average % of pay paid as mortgage across all mortgage payers. But if we just take recent borrowers, it's pretty well as bad as 1991, and only really started going up noticably in 2003 or so.

Billy Shears

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Don't like using the "vested interest" card, but...

http://www.housingoutlook.co.uk/Papers/jdw.pdf

But what is johndwood.co.uk? I expect it's a well-funded pressure group trying to get housing for FTBs...

Still we should be interrogating their method and interpretation rather then who they are. Ad hominem and all that.

And I say this even though I've just found out that John Wood and Co are...Estate Agents! :P

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It seems to be funded by a combination of the ODPM and the ESRC:

"This paper draws on research carried out for a project (“Affordability Targets: Implications for

Housing Supply”) funded by the Office of the Deputy Prime Minister (www.odpm.gov.uk). Support

from the ESRC under grant RES-000-23-0244 ‘Improving Methods for Macro-econometric Modelling’

is acknowledged."

But shouldn't it be their argument rather their funding that is attacked? (And the ESRC is the closest a researcher can get to funding without strings).

But Rich, I think you may be right about alternative models that focus on the ease of getting credit. If I'm right in my suspicion that they are assuming that the easy credit regime will continue and, under those conditions, they predict no decline of house prices, this might indicate that the "trigger" to the crash, if there is one, will be from tightening of the credit environment. I wonder what their predictions would look like if they did not assume stability in the CCI but factored in tightening of access to credit?

OK, OK, I was being a bit bitchy. But the ESRC is a government body, unlike say, the Wellcome trust...

But assuming unchanged credit conditions is very dangerous. When you assume, you make an ass out of u and me... ;)

Interesting times, interesting times...

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Still we should be interrogating their method and interpretation rather then who they are. Ad hominem and all that.

And I say this even though I've just found out that John Wood and Co are...Estate Agents! :P

How would you propose that their method and interpretation are interrogated?

Billy Shears

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But assuming unchanged credit conditions is very dangerous. When you assume, you make an ass out of u and me... ;)

Interesting times, interesting times...

Agreed. What we need are comments from those who understand econometrics on what the CCI really is and how the assumption that it will be unchanged until 2010 (I think that's the timeframe) might affect their predictions. Anyone out there?

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But there is a very interesting graph in the powerpoint presentation. It shows mortgage payments as a percentage of take home pay. As in previous graphs we've seen here lately, the current value is nothing compared to the 1991 peak when interest rates went high. But, there is an additional line on the graph for "recent borrowers" (or similar language). This line does go up considerably during the current boom, and is now roughly comparable to the peak for new borrowers during the last boom/bust circa 1991. This, I think, is very interesting as it contradicts claims made in this forum recently that affordability is much better now than it was at the peak of the 1991 boom, and shows why this is the case. Last time with high interest rates, everyone paying a mortgage was hit. This time with low interest rates, it's only the FTBs paying very high prices that are stretched, and their pain (mortgages taking up a large amount of take home pain) can't be seen if we take average % of pay paid as mortgage across all mortgage payers. But if we just take recent borrowers, it's pretty well as bad as 1991, and only really started going up noticably in 2003 or so.

Billy Shears

I agree to a certain extent; I don't think it will only be FTBs who have paid crazy prices but also the boomers who were sitting on low to no mortgages who have gone out and bought second/third properties or properties for kids. These too will be dragged down. Everyone will get hit again but for different reasons; so it will be slightly different to last time.

The number of people I know whose parents have bought multiple properties is phenomenal. All have put their heads above the parapet, all will probably get it blown off.

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How would you propose that their method and interpretation are interrogated?

Billy Shears

Well I'm not sure and working over the boundary of my knowledge but three questions I have are:

i) does the CCI reflect the ease/difficulty in getting credit;

ii) if it does, is it reasonable to expect it to remain unchanged over the next few years;

iii) if credit availability declines, what effect does this have on the house prices that the model predicts?

The way to get answers is either to run the same model (all the algorithms are spelt out in the paper) or ask the authors by emailing them.

Edited by New Bear

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I saw this and thought “most of the people I know couldn’t afford to buy 2/3 of their houses at the current prices” this sounds like another attempt to rationalise a situation that would have seemed absurd 5 years ago. Then I find out that the research is being published under the auspices of John D. Wood & Co. – had I known I wouldn’t have given it a second thought.

When we see the state of the economy and housing market after a few years when consumer debt’s only showing annual increases of, say twice the rise in post tax income rather than the unsustainable 4-6 times rate we’re seeing at the moment we’ll get to judge whether “The believers in the bubble were wrong.”

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This comes from the powerpoint presentation I mentioned. The slide title for these points was: "The Nickell Version". The slide was quoting an argument saying that the take home pay/house price equilibrium had changed, but that there was no bubble.

"Equilibrium level of UK house prices has risen for four reasons:

Strong income growth (more two-earner households, more income inequality);

Low elasticity of housing supply response;

Strong population growth and net household formation;

Low real interest rates and the disappearance of front-end"

Is it true that the income of households has grown strongly in the last few years? And has there really been net household formation? I thought someone posted statistics saying that this was not the case.

Billy Shears

Edited by BillyShears

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I saw this and thought “most of the people I know couldn’t afford to buy 2/3 of their houses at the current prices” this sounds like another attempt to rationalise a situation that would have seemed absurd 5 years ago. Then I find out that the research is being published under the auspices of John D. Wood & Co. – had I known I wouldn’t have given it a second thought.

When we see the state of the economy and housing market after a few years when consumer debt’s only showing annual increases of, say twice the rise in post tax income rather than the unsustainable 4-6 times rate we’re seeing at the moment we’ll get to judge whether “The believers in the bubble were wrong.”

In my personal beliefs I'm bearish on housing and the economy. So I agree with your opinion and sentiments. But here we have some clever economists saying we are wrong. I think the best thing to do is to test their model, its method, assumptions etc.

The fact that it might be published by an estate agent is suspicious but not strictly relevant to whether their argument is flawed.

BUT as a matter of fact, the research is not published by an estate agent. In fact the pepr in question seems to be published by Nuffield College, Oxford University. All we know is that to contact one of the authors you send letters to the EA's address. We don't know why.

We also know that the author is a leading housing economist, at Oxford University I think. Now call me naive if you like, I really don't care, but simply dismissing the evidence of such a person is not very credible.

Isn't it better to find if there is a flaw in the argument or not. Isn't doing that more likely to help us understand what is going on? And, if there is a flaw in their argument, isn't that more likely to convince more people than simply dismissing because he has some sort of contact with an EA?

Edited by New Bear

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If I recall correctly, I read something linked to from some post here which discussed the relationship to boom/bust in the property market to the underlying business cycle. The conclusion they made from graphs was that housing had closely followed the business cycle fairly closely over recent history, but recently we had had a business bust, in effect, but the property market had now followed this down. This "detaching" (if I remember correctly) of the house prices from underlying business strength was unprecedented, and this was only in the last few years. If I do remember this correctly, then a model that expects the housing market to follow underlying business conditions would be accurate up to about 2003 or so, but would be inaccurate after that as the current boom had been caused (or at least was correlated with) different factors from previous ones. If this is the case, then building models and evaluating them given past behaviour would be highly suspect. But that in itself is not enough to criticise the paper in discussion in this thread.

Does anyone remember the paper I'm talking about? I'm sure I followed a reference to it from here, and others may have done so as well.

Billy Shears

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In my personal beliefs I'm bearish on housing and the economy. So I agree with your opinion and sentiments. But here we have some clever economists saying we are wrong. I think the best thing to do is to test their model, its method, assumptions etc.

The fact that it might be published by an estate agent is suspicious but not strictly relevant to whether their argument is flawed.

BUT as a matter of fact, the research is not published by an estate agent. All we know is that to contact one of the authors you send letters to the EA's address. We don't know why.

Whatever, I really can’t be bothered to take it seriously. I’d like to know how many times the financial services industry, and I’d include estate agents in this, is going to be allowed to take Joe Public to the cleaners before we just learn to dismiss everything they, and their hired guns say out of hand. Let’s face it if the report trashed the market John D. Wood and Co. wouldn’t have anything to do with it.

If “Yes Car Credit” sponsored an academic “professor of the used car market” any paper he put out rationalizing the valuations of used cars would be treated as a joke. Why is this any different?

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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