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What Still Puzzles You?

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It's been interesting to see how things have developed in the last 2-3 years, more or less as some predicted albeit much slower than many expected. Market sentiment has turned, I think it is now safe to say.

I feel that I have a good grasp of the big picture forces at work, thanks in part to the many excellent posters on this site (especially those active in 2005) and from my own experiences. Most of my questions have been answered many times already. However there are still some questions where I have never found satisfactory answers.

For example:

I still do not understand why the BoE, the Treasury and the UK population generally accepts that house prices (and therefore the cost of shelter) is kept out of the inflation measures which are the major factor in determining interest rates.

What do you find puzzling about the way the housing market and the broader economy works? You never know somebody may have the answer for you, or they may never have thought about it before.

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I still do not understand why the BoE, the Treasury and the UK population generally accepts that house prices (and therefore the cost of shelter) is kept out of the inflation measures which are the major factor in determining interest rates.

I agree, it doesn't make sense.

Also why do people think that they have more money when their credit limit is extended on their already over-stretched credit card? In other words, how can people confuse someone lending money to them with actually owning the money.

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What still puzzles me?

"How can people still be blind to bubbles, when there's almost 400 years of well documented history on the subject?"

Ditto. I cannot understand why people like my parents - who lived through 2 previous booms and busts - cannot or will not see this one coming. I can only conclude that each time the boom happens, people suspend their disbelief because it suits them to do so and they are afraid of 'missing out'.

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I agree, it doesn't make sense.

Also why do people think that they have more money when their credit limit is extended on their already over-stretched credit card? In other words, how can people confuse someone lending money to them with actually owning the money.

Because 70% of the population believes what they are told by our right honourable friends :lol:

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Guest Popalot
It's been interesting to see how things have developed in the last 2-3 years, more or less as some predicted albeit much slower than many expected. Market sentiment has turned, I think it is now safe to say.

I feel that I have a good grasp of the big picture forces at work, thanks in part to the many excellent posters on this site (especially those active in 2005) and from my own experiences. Most of my questions have been answered many times already. However there are still some questions where I have never found satisfactory answers.

For example:

I still do not understand why the BoE, the Treasury and the UK population generally accepts that house prices (and therefore the cost of shelter) is kept out of the inflation measures which are the major factor in determining interest rates.

What do you find puzzling about the way the housing market and the broader economy works? You never know somebody may have the answer for you, or they may never have thought about it before.

I think Mervyn has made noises in the past to the effect that he agrees with us, and of course this, in spite of the Brown control of them and the Treasury. However, I agree with you about the UK population. And more braodly to its response to CPI data in general.....but is it the case of the 80/20 again. Sadly the 80 (sheeple) have not thre slightest idea what CPI is or how the economy works...this is why journalist traction on the issue is weak.

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I still just can't get my head round the mentality of most people who have been happy to pay the asking price for property which has been inflated by 100%/200% purely on the basis of low interest rates. Dont these people realise they are gambling? I also dont understand how a government can justify forcing people to gamble just to put shelter over their heads. It makes a visit to the casino seem rather innocent in comparison.

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Why some posters on this board believe that house prices will crash 50% and more

There are other countries in the world that are more prone for a HPC and its not happened there but for some miracle reason, it will happen here.

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I still do not understand why the BoE, the Treasury and the UK population generally accepts that house prices (and therefore the cost of shelter) is kept out of the inflation measures which are the major factor in determining interest rates.

My opinion is that the treasury support it because the government tell them to, the government support it because it allows real inflation (RIP) er sorry RPI (freudian slip typo) to rise higher than the public think it is, so there can be low interest rates that boom the economy. That combined with labour's "no more boom and bust" statements causes people to think there is not a boom, whereas there is in fact a boom, so labour get votes in the elections.

The UK population don't know the difference between CPI, RPI, and a hole in the ground.

The bank of England know, but are not interested in speaking out (it might affect their gold-plated final salary pensions etc).

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Why the vast majority of people seemingly don't question what they are told, read, or hear.

And how we ended up with a system of government so totally disconnected from the people who elect them, and why we allow this to continue. So i suppose it is a question about psychology and social conditioning rather than economics.

As far as economics goes, I have never fully understood the relationship between growth and inflation and why modest inflation is seen as a good thing and actively targetted as the main/only goal of our financial system.

I also wonder why so many people borrow eye watering sums of money to buy houses that appear to be worth half of what they are paying, and why the financial system (regulators) allows this.

I would love to see a body such as the consumer association perhaps report on the fundamental issues relating to UK land ownership, the control, price and manipulation of land and how ordinary people are conned into devoting their entire lives to wage-slavery to repay debts to the banks.

More than 1 sorry.

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I don't understand how people think the current situation is by accident.

I don't understand how people can moan about the people in government but think the institution is a requirement.

I donn't understand why after every regulatory failure, the solution proposed is more regulation.

I don't understand why the banking system, which is based on a very old fraud is never moaned about, but people who lie to it are.

I don't understand why no one questions the idea of buying a house in the first place, and just moans about the price.

I don't understand the mentality of people who think they are owed something just because they exist.

And so on......

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It's been interesting to see how things have developed in the last 2-3 years, more or less as some predicted albeit much slower than many expected. Market sentiment has turned, I think it is now safe to say.

I feel that I have a good grasp of the big picture forces at work, thanks in part to the many excellent posters on this site (especially those active in 2005) and from my own experiences. Most of my questions have been answered many times already. However there are still some questions where I have never found satisfactory answers.

For example:

I still do not understand why the BoE, the Treasury and the UK population generally accepts that house prices (and therefore the cost of shelter) is kept out of the inflation measures which are the major factor in determining interest rates.

What do you find puzzling about the way the housing market and the broader economy works? You never know somebody may have the answer for you, or they may never have thought about it before.

1. I still do not understand why the BoE, the Treasury and the UK population generally accepts that house prices (and therefore the cost of shelter) is kept out of the inflation measures which are the major factor in determining interest rates.

There is one good reason for excluding the value of any asset class from any such index, which is that, otherwise, the practice of tracking pensions, benefits, wage bargaining &c would create a self-feeding trend. If it were included, than as the asset bubble inflates, so would the incomes which track it, thereby creating more money to fuel it, and so on.

On the other hand, I don't see why they shouldn't be used to determine the setting of interest rates. Using inflation to set monetary targets, and using it to index-link income, are two different things.

2. How can people still be blind to bubbles, when there's almost 400 years of well documented history on the subject?

A point to note: modern financial theory has been dominated since the 1970's by something called the 'efficient market hypothesis'. Sometimes called (more descriptively) the 'random walk theory'. According to the theory, markets immediately absorb all available information into the price. The only thing that can therefore affect the price is news. Since news, by definition, is random (think about it), asset prices (or rather, the future asset price as determined by the forward market) must be random.

According to this theory, bubbles cannot exist. There were lots of published papers in the 80's and 90's 'proving' that historical bubbles were not bubbles at all, and had a valid explanation based on the available information at the time.

The exception to this was Robert Shiller, who will need no introduction here. He was the first major economist (I think) to challenge this theory. One of his arguments was that the volatility of a forecast, according to the 'random walk' theory, cannot exceed the volatility of the thing it is forecasting. Shiller showed that the volatility of dividend predictions grossly exceeds the volatility of actual dividends. Shiller famously predicted the stock market crash of 2000-1, and also, even more famously, that there will be a HPC.

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I cannot understand why people like my parents - who lived through 2 previous booms and busts - cannot or will not see this one coming.

I can understand the niaivity of first time buyers thinking that somehow, things have changed and property is always a safe bet, so "you have to buy before you miss the boat". But those who have seen it all before and should know better?? I don't get it either. My only conclusion is that people are generally thick as shit and just do what other people do!

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Guest pioneer31
What do you find puzzling about the way the housing market and the broader economy works?

I'm puzzled as to why delegates at the Labour Party Conference, stand and applaud a man, who has robbed them blind.

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2. How can people still be blind to bubbles, when there's almost 400 years of well documented history on the subject?

A point to note: modern financial theory has been dominated since the 1970's by something called the 'efficient market hypothesis'. Sometimes called (more descriptively) the 'random walk theory'. According to the theory, markets immediately absorb all available information into the price. The only thing that can therefore affect the price is news. Since news, by definition, is random (think about it), asset prices (or rather, the future asset price as determined by the forward market) must be random.

According to this theory, bubbles cannot exist. There were lots of published papers in the 80's and 90's 'proving' that historical bubbles were not bubbles at all, and had a valid explanation based on the available information at the time.

The exception to this was Robert Shiller, who will need no introduction here. He was the first major economist (I think) to challenge this theory. One of his arguments was that the volatility of a forecast, according to the 'random walk' theory, cannot exceed the volatility of the thing it is forecasting. Shiller showed that the volatility of dividend predictions grossly exceeds the volatility of actual dividends. Shiller famously predicted the stock market crash of 2000-1, and also, even more famously, that there will be a HPC.

aha, so that's why the general public don't see asset bubbles, they are all firmly behind the efficient market hypothesis.

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Guest pioneer31
Why some posters on this board believe that house prices will crash 50% and more

There are other countries in the world that are more prone for a HPC and its not happened there but for some miracle reason, it will happen here.

Why some people believe that after sustained and aggressive HPI and insane lending, it's all going to be a nice, gentle, comfortable, 'happy' ending, where FTB's are locked out forever and we migrate to Dickensian times.

Edited by pioneer31

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I'm puzzled as to why delegates at the Labour Party Conference, stand and applaud a man, who has robbed them blind.

Agreed. He is a wolf in sheeps clothing. i.e. An oldschool Tory!

Labour have somehow let Maggie Thatchers reincarnation in through the back door and shaft them so hard that they will never recover. However..... they stand up and applaud him! Beyond belief!

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Why the vast majority of people seemingly don't question what they are told, read, or hear.

Heuristics.

No-one can afford the time in their busy day to understand everything. Some of us try to understand the markets, economics or politics. I bet there are not many people her though who know much about genetics - there is simpley not the time for us all to be modern day rennaisance men. So instead, we use simple indicators of the correct course of action, like following the crowd. The fact is that 99% of the time it makes sense to follow simple rules like:

"Look left and right when crossing the road, but don't bother looking up"

"Buy property. It always goes up"

However every once in a while someone gets hit by a falling piano.

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Ditto. I cannot understand why people like my parents - who lived through 2 previous booms and busts - cannot or will not see this one coming. I can only conclude that each time the boom happens, people suspend their disbelief because it suits them to do so and they are afraid of 'missing out'.

Think this is linked to the 'why they don't understand inflation' question. House prices have never crashed

nominally according to the 50 year chart I saw. No one in the 'real world' (i.e. outside sites like this) even

considers inflation-based falls.

Most people don't watch house prices constantly. When nominal prices aren't going up, the subject goes underground for a few years, until the HPI monster comes out of it's cave again.

Least that's how I explain my relatives' attitudes.

Pent

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