July 2007, Email Conversation With David Smith.

[apom]

Quite a while ago now I posted on David Smiths forum thread, posted against a comment that was made by him that:

"we are going to see is modest or no rises in house prices. A very dull market in some ways. A house price crash in the absence of an economic recession? It just doesn't happen in the UK"

The thread had run for a while and can be found here:

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

Now, I did find the thread in July 2007 and in David Smiths defence he did post the topic back in 2005.

But my response was this:

With confirmation from Lord Edward George that the housing boom was manufactured to deliberately encourage the massive take up of debt that would then be injected into the economy attitudes have changed.

There is no shortage of housing, never has been:

That is a fact.

It was all about selling debt and convincing people that they were richer as they took on catastrophic levels of debt. Keeping Interest Rates artificially low for as long as they could.

This made it possible to re-mortgage most homes in the country to borrow a further £80,000 and for the home owners to still have lower mortgage payments.

Pretending that £700,000,000,000.00 of extra debt was not inflationary was frankly criminal.

Oh, and this is too the expert who posed the original paper.

House price crashes lead into recessions, not the other way round. That is an absolute fact.

Now, this may appear a trifle augmentative, but in my own defence this was before the time that the housing markets inevitable decline was even considered in main stream media, David Smith was singing the company line and people were rushing in, today is different and perhaps attitudes changing have made us complacent.

What caught me by surprise is that he actually emailed me:

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What are you going on about?

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That was it, so I explained.

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I don't know to which point you are referring; Too be honest I am surprised to have heard back from you but I do appreciate that you have taken the time to do so.

1: Lord Edward George, Mervyn Kings predecessor as head of the boe and chair of the MPC admitted that they manufactured the housing boom in 2001 to avoid a recession . This they managed by creating artificially low interest rates... That coupled with the new inflation measure neither covering house prices or the debt used to buy housing allowed borrowing to actually become cheaper as debt levelled soared... 140000 in 2001 would cost the same in interest as about 210000 in 2003...

Essentially over 700,000,000,000.00 of this borrowing has been injected into the money supply and we are told this is non-inflationary...

2: When Labour attained power there were 2.76 people per home, in 2004 this was down to 2.6 and we are building 2.1 homes for every person that the population increases by.

This is substantiated by dropping rents and increasing voids in the rental areas, thousands of empty new builds across the country.

3: recessions and the housing market.

Figures from the ONS for average house prices charted against average salary and graphed will show that house prices drop about 15 percent before the recessions get going.

I have friends in Devon in negative equity, I have seen friends with 170,000 mortgages against flats that can be bought new in a later development phase for 130,000 plus discounts.

In Cardiff a friends sister just bought an executive flat for 160,000 from a guy who paid 250,000 three years ago..

Since the dawn of mankind's economic history there has never been a boom that has not bust... Not one...

But every time people are surprised...

To quote warren buffet... "for every bubble a pin awaits and when the two meet some new investors learn some very old lessons"

I again thank you for your time in this.

"INSERT NAME HERE"

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Brilliant, my little voice had been heard squeaking in the background....

He then replied to me:

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"INSERT NAME HERE"

Well I'm afraid you are wrong on every count. Lord George said that when the global economy was weak in 2001 the Bank acted to stimulate domestic demand to keep the economy going, A side effect of that may have been to boost the housing market but that was not the intention.

You don't appear to know the difference between a rise in the level of household debt and the money supply. Household debt has risen, but so have household assets - the net financial position of the household sector is strong - assets exceed liabilities by around five to one.

You assert that house prices drive the economy into recession, and then quote earnings data. The last UK recession started in the middle of 1990. At that time national house prices were still rising, as this link

shows: http://www.communities.gov.uk/pub/115/Table506_id1156115.xls

I'm glad for comments on the site, but I'm always a little surprised that people don't check a few facts first.

David Smith

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Red Rag to a very frustrated bull, also a little personal, when my email had not been.

So, I of course replied: escalating a little perhaps

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Brilliant, thank you for getting back to me.

I will have to beg to differ, I was right.

On every single point...

Can I come back to you on certain points?

Lord Edward George deliberately fuelled a consumer boom and was fully aware that it was going to drive the housing market through the roof:

"We knew that we were having to stimulate consumer spending; we knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term."

"But for the time being, if we had not done that the UK economy would have gone into recession just as has the United States."

"That pushed up house prices, it increased household debt ... my legacy to the MPC if you like has been `sort that out'."

Did you know that mortgage equity release made up about 11% of the money spent into the economy in 2003?

"Stimulate Domestic Demand" > It built a debt bubble and did so on purpose, the economy has been based on this debt since the turn of the century.

I am not cherry picking from his comments to prove a point that I want to make, and I am of course not trying to convince you of anything.

But you have not read his comments about this and then come to your conclusion.

He admitted to doing exactly what I said he did and if you want to believe otherwise then good luck.

When you take a deliberate action and know of inevitable consequences to your actions then those consequences become deliberate.

So, without question I was right.

Also, in 2003 1/3rd of all new mortgages were "Income non verified" and 1/5th of outstanding mortgage debt was also "income non verified"

Lie to Buy, is not just prevalent, it became the norm and the subprime market in the uk that the concerns are accelerating against does not even look at who may or may not have been a little fast and loose with the truth.

That scares the hell out of me, as do the 200,000 people a month who are coming of their fixed rate terms.

This was my favourite:

You don't appear to know the difference between a rise in the level of household debt and the money supply. Household debt has risen, but so have household assets - the net financial position of the household sector is strong - assets exceed liabilities by around five to one.

There are tens of millions of homes in the country and only a few have been bought and sold at today's prices during this cycle and you defend a 300% asset price inflation because only a proportion of the assets have exchanged hands at this price? (Note: 300% is perhaps pushing my luck, but some areas have gone crazy) That is incredible.

My parents have paid of their mortgage years ago, as have most of the boomer generation, People live for 80- years, own homes for 50 (ish) so of course a 8 year boom would not actually entice everyone to rush out and get a mortgage to the speculative value, to increase their borrowing.

You have a situation when two neighbours can have hundreds of thousands of pounds difference in their mortgage and only half a decade between purchases.

So the country is now worth more because we are paying each other more for our houses? You know better than that, the money does not exist.

Without sounding like I am being over simplistic, but in what way have you made any sort of defence of a market beyond proving to me that for every one person invested and caring about today's current values there are 5 who couldn't care less. Trust me when you I say that I am far from convinced that this "Household asset" or increase of house prices has made the country richer.

"Hey Jim, if we both pay each other an extra £100,000 for our homes are we not £100,000 richer" That does make it sound a little silly does it not?

The debt is of course an increase in the money supply, it is money bought from the future and injected into today. The person holding the mortgage has been shielded from their debt by artificially low interest rates whilst the person that they have bought the property from has had a nice fat wad given to them and therefore injected into the economy.

Mewing, which is the favourable term used when referring to the release of equity from homes has (of course) also been an increase to the money supply.

If you are referring the CPI basket not considering this then that is your prerogative.

But, inflation is not things getting more expensive, it is the supply of money increasing to pay for the more expensive things.

If there was a new measure of drink driving that did not measure gin as an alcoholic beverage, if a large chunk of the population bought into that and gin sellers lined each street shouting about how "Gin is Great"

Personally I would stay of the roads.

Recessions and the Housing Market:

And I know what you say about the timing of recessions, but the attached graph shows my findings based on average salary, average house prices and then recessions.

Figures will appear different on sources but your comments were dangerous as to the timing of recessions and the housing market, and I would have thought that Lord Edward Georges comments about creating the boom in credit to avoid a recession would have given you pause for thought:

Note: I use average salary to basically rule out general inflation, for although average salary does lag behind inflation it does give a clear and accurate enough example of the value of a pound at any time.

Such value I know you are aware is fluid.

If I earn 50% more in the same job as I did in 2000 but a DVD player is now a third of the price am I actually (Salary * 1.5) *3 richer?

I am of course not, but I would be if wealth was measured in DVD players.

But of course DVD players are much cheaper because the development lifecycle has been paid for and they are now manufactured in countries with comparatively low salaries and favourable exchange rates.

This made us all feel richer, allowed CPI to drop and interest rates to drop, people could borrow more and do so cheaply.

(A £140,000 mortgage at 6% is cheaper than a £210,000 mortgage at 3,5% when considering interest alone) So the UK exported its manufacturing, but the population became richer as they borrowed more and paid each other more and more for their houses.

As people borrowed this money it was injected into the economy under the measure of inflation and actually allowed interest rates to drop further.

The city did really well, selling mortgage backed equities abroad at a time when swap rates were massively favourable even when our lending rates were hovering at about 4%.

So the debt and the manufacturing were sold abroad, the dot com bubble had left an infrastructure or communication across Europe and India and the USA that enabled call centres to move abroad cutting our costs down so that even services were becoming cheaper and we became richer.

Richer because we were paying each other more and more for our houses.

You accuse me of not knowing what I am talking about, and I do not have the flash economics expert background, but I am a clever chap and few things hold any real challenge to me.

Since the dawn of time there has not been a bubble that has not burst, and each time there is a bubble it is filled with experts able to say why this will be different this time.

Without fail they have been wrong.

The current head of the BOE has promised us that:

Mr King is nervous that homeowners may not realise that although low interest rates make mortgage repayments affordable, high inflation will not erode the value of their borrowing, as it did in the 1970s - and when they do catch on, house prices will plunge.

House Prices area a matter of opinion, debt is real.

Economists are not the experts, business men are and Goldman Sachs took a short against GB PLC this year citing our housing market as the main reason.

America is crashing, Spain is, regions in Australia are...

It's never different this time, it is always the same.

I just wish that my friends languishing with mortgages that they struggle whilst in negative equity had listened to me, not people like you.

The crash is amongst us, look at the transaction rates, how many are selling...? It has hit a brick wall.

On a final note, I saw by your last reply that I had upset you and for that I do apologise.

Speculative markets are messy, when it's about housing they are emotional times and I know that it must be difficult.

But to kid anyone that this has been about housing is wrong, it has only ever been about the sale of debt to the UK population, hiding it as wealth and then selling that debt abroad.

Economists are always right, up to the point that they become wrong.

It is the way of bull markets and much like Bart Simpson who wouldn't learn that the cake was electrified by Lisa’s science experiments too many people will just never learn

"INSERT NAME HERE"

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Now, shockingly my words do seem a little argumentative and he did reply again...

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I'm sorry "INSERT NAME HERE", but that's one of the most bizarre set of arguments and use of statistics I've come across, but we'll have to agree to differ. As I say, the MPC did not set out to boost the housing market but, as the quote from Lord George makes clear, it was a by-product of action to boost domestic demand, as I said. Everything else you said was, frankly, economic and statistical nonsense, including your definition of recession.

Just one thing you should know - and this is a common misconception - 90% of mortgage equity withdrawal is not spent, but saved. The reason is that MEW mainly occurs when older people sell up and downsize, or move into a home. There's plenty of literature on this.

As I say, you don't know what defines a recession, what the difference is between debt and the money supply, etc. If you're a clever chap, why don't you take the time to research these things, or you'll just go on making a fool of yourself? I don't say this in a nasty way because you seem genuinely interested in debate.

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Now, I deserved the dig, I called myself a clever chap... But I am in my own way... and can I be honest....?

Krusty has only ever referred to housing, you can forgive her to some extent that she did not understand that greater economic pressures... But this guy is an economist and he must have know that speculative gains in a market that replied on exponentially increasing amounts of money being borrowed could not have gone on forever.. He must have know.... Why has he always said what he has...? Can he have believed it??

I replied:

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The trouble is that you may have read the reports of lord Edward Georges comments and not his rebuttal to these reports.. His actual words were chilling... And it’s not like old mervyn king has been highly positive...

The economical tripe that I am speaking is actually accurate.

Look the whole miracle economy has been based solely on the massive take up of debt, and this has never once been about housing, it has been about the sale of debt. Fact

I can talk of boom and bust, and list economists who seem surprised each time.

I can show you thousands of new build flats littering the cities, un wanted and not needed...

I can show you people I know in negative equity, unable to sell or rent it out for enough to even cover a proportion of the mortgage. People who would be tens of thousands less in debt had they not jumped due to the mis information that they had...

Negative equity is a nasty place to be, and at the moment people are entering into staggering levels of debt that they don't really understand...

Mew is huge, but you misunderstood, when I said that it was about 11% of the money spent into the economy in 2003 it was... And you can chart the hundreds of billions being injected into the money supply straight from the ons... As I have...

700,000,000,000

There are 150,000,000 stars in our galaxy I can't even say that the numbers are astronomical anymore...

I am not making a fool of myself, I am fully aware the M4 money supply is not a cashpoint at a motorway service station...

And I have friend who has just bought a flat in Cardiff for ninety thousand less the it was bought for in 2004

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He Replied:

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"INSERT NAME HERE",

I'm sorry to have to be harsh but I knew you were out of touch with reality, but I didn’t quite know how much. I assumed you were describing the situation of the early 1990s, not the current situation.

This explains your initial very odd comment on the site. The housing market hasn’t crashed, on any measure. The problem is that house prices are rising too much, not that they are tumbling. If that's what you believe, you really do have a problem, the problem of spouting unmitigated tripe.

This correspondence is now closed.

David Smith

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Could I let him have the last word? Could you have...?

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Okay, interesting response and a little angry and I am sorry to have upset you but I think that you will grant me the opportunity to at least respond.

It is a shame that you have not kept with any measured consideration in your last email. That you resort to insults.

That you call me delusional.

The fact is that new builds are dropping in some areas and I have friends who bought in earlier phases of a development who are now surrounded by later phases of identical properties being offered for considerably less than they paid. Or owe (due to some markedly high ill advised LTV mortgages)

This is a very unpleasant situation for one couple who are in the process of a break up. They would rent it if rent would cover more then 2/3rds of their interest.

New build flats dropped on average across the UK last year. So claim the people who built them.

I did not say that the market was collapsing, but there is no magic army of wizards rushing around deciding value. Price is what you pay, value is what you get. And some prices are dropping and some are rising.

The massive £90,000 loss in Cardiff is very real.

But it was bought by a businessman and a scientist, perhaps the loss was made by an economist

You didn't respond to the transaction volume comment, nor did I expect you to.

The housing market has surged under an environment of cheep and loose credit kept artificially cheep by inaccurate measures of inflation. The CPI not measuring either house prices or the debt used to buy them is an interesting approach and if some say that this is a true measure then it is at least open to debate and I would certainly be on the opposing side.

Some out here are very aware of the effect this debt has had on the economy, creating what appeared to be very prosperous times.

This has never been about housing; this has been about the business of lending, supported in an economy which owes much of its growth to the massive uptake of this borrowing.

You say what I say is tripe and perhaps I have not explained myself well enough.

If you believe that house prices are not over-inflated after a period of artificially low interest rates that is where we differ and I accept that.

If you believe that the sub-prime and fraudulent borrowers out there will be able to maintain their debt now interest rates are heading back toward long term averages then that is again your prerogative.

If you believe that they make up only a fraction of borrowers then they do, but they are in the highest fraction of LTV out there and 1/3rd is a fraction.

If you think that there is actually a shortage of housing that is not created by speculative belief in price gains then that is not either my experience or belief or my findings.

If you have not seen the headline news of the empty new build flats all over the country I would recommend that you look into it, it is frightening.

If you do not believe that it is possible for someone to pay less today for some properties then they would have two years ago then you and I disagree, I do accept that you can also pay more.

Rents are dropping where I am, and the voids are increasing.

That is Kensington in London.

But this is not about isolated areas, this is about a market.

I believe that it is a speculative market. When I first approached your site I thought that Lord Edward George's comments were relevant and I still do. I also said that we have more homes per head of capita then we did last time and we do, and the recession comment, I was there last time as I am this time if the figures that you see and I see are different then that is where discussions come from.

I have an easy approach to this; I do not have a reputation that is now intertwined in believing that the biggest boom in the world's history will be the first not to burst. I just have a casual interest.

I do believe that I am right, but I was not offered any counter argument.

Only abuse, to accuse me of saying the whole market is crashing when I mention two examples is childish, the examples are valid.

By the way, the whole market is crashing...

But you will discount all I say, not with argument but with disdain and I am sure that you will be able to laugh at my perspective with your colleagues.

But consider this, if Newton was not a physicist but was instead an economist he would still be sat under a tree surprised at each time an apple landed on his head and working on his theory of davity, the flying apple.

It is easy to be right in a boom, embarrassing to be caught out by the bust.

Quite frankly embarrassing.

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So it was left. The last email was sent by me on the 17/07/2007

I never heard back from him again.

Now, I was not right in everything I said... But it does seem like I had a magic 8-ball

The names (mine) have been changed to protect the innocent.

Thought you might find the thread interesting...

Don't judge me too much

Regards

Apom.

[goonboy]

I feel quite sorry for poor old David, unlike some in the press I don't think

has has vested interests in the housing market, I think he honestly believes

what he writes...

Which is a bit of a shame considering it's a load of old rubbish!

... he's just a bit dim.

Poor, poor, poor old simple David Smith...

He reminds me of the Scott Adams (of Dilbert fame) observation that an economist

is someone who proposes to be an expert on money, whilst dressing like a flood victim!

Poor old Dave

gB

PS Dave, if you are reading please consider contacting the Samaritans before doing anything stupid,

despite writing for the Times and being consistently wrong in your given career as an economist your life is not a sad wasted failure, take care...

[the_duke_of_hazzard]

Have you written back to him to gloat?

[Lone_Twin]

Thanks Apom. What's really interesting is how quickly these self proclaimed experts

are prepared to collapse into personal attacks. He didn't put up a single logical argument,

sad really that this type of person should get so much press/air time.

.

Could you just reply one more time with "I told you so"

.

ST

[RajD]

Nice one apom.

For an economist he appears to have very little grasp of the basic fundamentals I dread to think how many people were misled into making bad investments by reading his claptrap

[desertorchid]

I feel quite sorry for poor old David, unlike some in the press I don't think

has has vested interests in the housing market, I think he honestly believes

what he writes...

Which is a bit of a shame considering it's a load of old rubbish!

... he's just a bit dim.

Poor, poor, poor old simple David Smith...

He reminds me of the Scott Adams (of Dilbert fame) observation that an economist

is someone who proposes to be an expert on money, whilst dressing like a flood victim!

Poor old Dave

gB

PS Dave, if you are reading please consider contacting the Samaritans before doing anything stupid,

despite writing for the Times and being consistently wrong in your given career as an economist your life is not a sad wasted failure, take care...

Yes, indeed.

I read the correspondance and desperately tried to get angry, to hate David and to find his arguments lacking. However, after a a while I just felt pity. I'm afraid he has no concept of modern economic thinking. Everything APOM says is succinct and rational. Everything David says is muddled and angry.

Unfortunately this links to a clear problem with the social structure of the UK. People like David can live their lifestyle (I would guess baby boomer , 5 bedroom detached etc) whilst in denial and spouting this tripe (his words) for reward. Others, with much greater intellect, ambition and ability are stiffled and strangled by the system which allows people like David to look down his nose at others. Right, now I'm getting angry...........

Edited April 26, 2008 by desertorchid

[Guest Shedfish]

nice one - a thorough drubbing i'd say

it has only ever been about the sale of debt to the UK population, hiding it as wealth and then selling that debt abroad.

there's the nub

[Lone_Twin]

"we are going to see is modest or no rises in house prices. A very dull market in some ways. A house price crash in the absence of an economic recession? It just doesn't happen in the UK"

Apom, you should have just shown him this graph, and left it to his own mighty brain to work out which came first, the chicken or the egg?:

What comes first is not shown on the graph. Both the housing market crash and the recession

are symptoms of credit contraction. The housing market just responds faster as it is mostly

reliant on credit rather than partly reliant as in the case of the wider economy/commerce.

.

That's not to say that the housing price collapse does not contribute to the reccsesion but we should

not confuse sequentiality with causality.

.

ST

[Killer Bunny]

I used to have conversations with him and he even referred to me (indirectly) in one of his columns - something like economically naive correspondents... - but curiously I have no access to his website any longer. Funny that.

[steve99]

"we are going to see is modest or no rises in house prices. A very dull market in some ways. A house price crash in the absence of an economic recession? It just doesn't happen in the UK"

Apom, you should have just shown him this graph, and left it to his own mighty brain to work out which came first, the chicken or the egg?:

These David Smith type people are not, when the SHTF the quietly defeated to be 'felt sorry' for characters they usually apear become, they have spent years convincing the general public to mortgage away their future in order to stroke his own ego and have helped to heap great misery on much of the population, a bit like a drug dealer selling new sweeties to the kids, all good fun at first, but a lot of bother later on. That is, they are indeed bad people. Just like the Dot.com fiasco, I remember the 'New Paradigm' type economists in 1999 convincing many people that they would be stupid not to buy in 'now' on account that this new business model would supersede everything that went before, etc etc, I know of 2 youngish people who had put all their house deposit money into this crap and lost the lot, in one case £50K, he still hasn't got a house and is now nearly 40, what a waste, just as there will be much waste to come over the HPC.

The graph is along the lines of what I have always considered to be the outcome of this, ie we will go back to 2000 - 2001 prices and wage inflation will not be there to erode it, nominal terms will almost equal real terms when it comes to the pricing, ie exactly half of where we are today.

[eightiesgirly]

Reading the replies, his poorly supported arguments, it's little wonder we are in this mess. Makes you realise how very, very fortunate we are here in that we can see a path through all this utter nonsense. I fear yet again we will be in the minority.

A lot of folk are going to be very confused and badly hurt.

[pelican]

http://boards.fool.co.uk/Message.asp?mid=11028303

Worth a read seems DS has been deleting a few embarassing lines.

Edited April 26, 2008 by pelican

[tricksters]

Quite a while ago now I posted on David Smiths forum thread, posted against a comment that was made by him that:

"we are going to see is modest or no rises in house prices. A very dull market in some ways. A house price crash in the absence of an economic recession? It just doesn't happen in the UK"

The thread had run for a while and can be found here:

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

Now, I did find the thread in July 2007 and in David Smiths defence he did post the topic back in 2005.

But my response was this:

With confirmation from Lord Edward George that the housing boom was manufactured to deliberately encourage the massive take up of debt that would then be injected into the economy attitudes have changed.

There is no shortage of housing, never has been:

That is a fact.

It was all about selling debt and convincing people that they were richer as they took on catastrophic levels of debt. Keeping Interest Rates artificially low for as long as they could.

This made it possible to re-mortgage most homes in the country to borrow a further £80,000 and for the home owners to still have lower mortgage payments.

Pretending that £700,000,000,000.00 of extra debt was not inflationary was frankly criminal.

Oh, and this is too the expert who posed the original paper.

House price crashes lead into recessions, not the other way round. That is an absolute fact.

Now, this may appear a trifle augmentative, but in my own defence this was before the time that the housing markets inevitable decline was even considered in main stream media, David Smith was singing the company line and people were rushing in, today is different and perhaps attitudes changing have made us complacent.

What caught me by surprise is that he actually emailed me:

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What are you going on about?

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That was it, so I explained.

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I don't know to which point you are referring; Too be honest I am surprised to have heard back from you but I do appreciate that you have taken the time to do so.

1: Lord Edward George, Mervyn Kings predecessor as head of the boe and chair of the MPC admitted that they manufactured the housing boom in 2001 to avoid a recession . This they managed by creating artificially low interest rates... That coupled with the new inflation measure neither covering house prices or the debt used to buy housing allowed borrowing to actually become cheaper as debt levelled soared... 140000 in 2001 would cost the same in interest as about 210000 in 2003...

Essentially over 700,000,000,000.00 of this borrowing has been injected into the money supply and we are told this is non-inflationary...

2: When Labour attained power there were 2.76 people per home, in 2004 this was down to 2.6 and we are building 2.1 homes for every person that the population increases by.

This is substantiated by dropping rents and increasing voids in the rental areas, thousands of empty new builds across the country.

3: recessions and the housing market.

Figures from the ONS for average house prices charted against average salary and graphed will show that house prices drop about 15 percent before the recessions get going.

I have friends in Devon in negative equity, I have seen friends with 170,000 mortgages against flats that can be bought new in a later development phase for 130,000 plus discounts.

In Cardiff a friends sister just bought an executive flat for 160,000 from a guy who paid 250,000 three years ago..

Since the dawn of mankind's economic history there has never been a boom that has not bust... Not one...

But every time people are surprised...

To quote warren buffet... "for every bubble a pin awaits and when the two meet some new investors learn some very old lessons"

I again thank you for your time in this.

"INSERT NAME HERE"

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Brilliant, my little voice had been heard squeaking in the background....

He then replied to me:

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"INSERT NAME HERE"

Well I'm afraid you are wrong on every count. Lord George said that when the global economy was weak in 2001 the Bank acted to stimulate domestic demand to keep the economy going, A side effect of that may have been to boost the housing market but that was not the intention.

You don't appear to know the difference between a rise in the level of household debt and the money supply. Household debt has risen, but so have household assets - the net financial position of the household sector is strong - assets exceed liabilities by around five to one.

You assert that house prices drive the economy into recession, and then quote earnings data. The last UK recession started in the middle of 1990. At that time national house prices were still rising, as this link

shows: http://www.communities.gov.uk/pub/115/Table506_id1156115.xls

I'm glad for comments on the site, but I'm always a little surprised that people don't check a few facts first.

David Smith

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Red Rag to a very frustrated bull, also a little personal, when my email had not been.

So, I of course replied: escalating a little perhaps

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Brilliant, thank you for getting back to me.

I will have to beg to differ, I was right.

On every single point...

Can I come back to you on certain points?

Lord Edward George deliberately fuelled a consumer boom and was fully aware that it was going to drive the housing market through the roof:

"We knew that we were having to stimulate consumer spending; we knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term."

"But for the time being, if we had not done that the UK economy would have gone into recession just as has the United States."

"That pushed up house prices, it increased household debt ... my legacy to the MPC if you like has been `sort that out'."

Did you know that mortgage equity release made up about 11% of the money spent into the economy in 2003?

"Stimulate Domestic Demand" > It built a debt bubble and did so on purpose, the economy has been based on this debt since the turn of the century.

I am not cherry picking from his comments to prove a point that I want to make, and I am of course not trying to convince you of anything.

But you have not read his comments about this and then come to your conclusion.

He admitted to doing exactly what I said he did and if you want to believe otherwise then good luck.

When you take a deliberate action and know of inevitable consequences to your actions then those consequences become deliberate.

So, without question I was right.

Also, in 2003 1/3rd of all new mortgages were "Income non verified" and 1/5th of outstanding mortgage debt was also "income non verified"

Lie to Buy, is not just prevalent, it became the norm and the subprime market in the uk that the concerns are accelerating against does not even look at who may or may not have been a little fast and loose with the truth.

That scares the hell out of me, as do the 200,000 people a month who are coming of their fixed rate terms.

This was my favourite:

You don't appear to know the difference between a rise in the level of household debt and the money supply. Household debt has risen, but so have household assets - the net financial position of the household sector is strong - assets exceed liabilities by around five to one.

There are tens of millions of homes in the country and only a few have been bought and sold at today's prices during this cycle and you defend a 300% asset price inflation because only a proportion of the assets have exchanged hands at this price? (Note: 300% is perhaps pushing my luck, but some areas have gone crazy) That is incredible.

My parents have paid of their mortgage years ago, as have most of the boomer generation, People live for 80- years, own homes for 50 (ish) so of course a 8 year boom would not actually entice everyone to rush out and get a mortgage to the speculative value, to increase their borrowing.

You have a situation when two neighbours can have hundreds of thousands of pounds difference in their mortgage and only half a decade between purchases.

So the country is now worth more because we are paying each other more for our houses? You know better than that, the money does not exist.

Without sounding like I am being over simplistic, but in what way have you made any sort of defence of a market beyond proving to me that for every one person invested and caring about today's current values there are 5 who couldn't care less. Trust me when you I say that I am far from convinced that this "Household asset" or increase of house prices has made the country richer.

"Hey Jim, if we both pay each other an extra £100,000 for our homes are we not £100,000 richer" That does make it sound a little silly does it not?

The debt is of course an increase in the money supply, it is money bought from the future and injected into today. The person holding the mortgage has been shielded from their debt by artificially low interest rates whilst the person that they have bought the property from has had a nice fat wad given to them and therefore injected into the economy.

Mewing, which is the favourable term used when referring to the release of equity from homes has (of course) also been an increase to the money supply.

If you are referring the CPI basket not considering this then that is your prerogative.

But, inflation is not things getting more expensive, it is the supply of money increasing to pay for the more expensive things.

If there was a new measure of drink driving that did not measure gin as an alcoholic beverage, if a large chunk of the population bought into that and gin sellers lined each street shouting about how "Gin is Great"

Personally I would stay of the roads.

Recessions and the Housing Market:

And I know what you say about the timing of recessions, but the attached graph shows my findings based on average salary, average house prices and then recessions.

Figures will appear different on sources but your comments were dangerous as to the timing of recessions and the housing market, and I would have thought that Lord Edward Georges comments about creating the boom in credit to avoid a recession would have given you pause for thought:

Note: I use average salary to basically rule out general inflation, for although average salary does lag behind inflation it does give a clear and accurate enough example of the value of a pound at any time.

Such value I know you are aware is fluid.

If I earn 50% more in the same job as I did in 2000 but a DVD player is now a third of the price am I actually (Salary * 1.5) *3 richer?

I am of course not, but I would be if wealth was measured in DVD players.

But of course DVD players are much cheaper because the development lifecycle has been paid for and they are now manufactured in countries with comparatively low salaries and favourable exchange rates.

This made us all feel richer, allowed CPI to drop and interest rates to drop, people could borrow more and do so cheaply.

(A £140,000 mortgage at 6% is cheaper than a £210,000 mortgage at 3,5% when considering interest alone) So the UK exported its manufacturing, but the population became richer as they borrowed more and paid each other more and more for their houses.

As people borrowed this money it was injected into the economy under the measure of inflation and actually allowed interest rates to drop further.

The city did really well, selling mortgage backed equities abroad at a time when swap rates were massively favourable even when our lending rates were hovering at about 4%.

So the debt and the manufacturing were sold abroad, the dot com bubble had left an infrastructure or communication across Europe and India and the USA that enabled call centres to move abroad cutting our costs down so that even services were becoming cheaper and we became richer.

Richer because we were paying each other more and more for our houses.

You accuse me of not knowing what I am talking about, and I do not have the flash economics expert background, but I am a clever chap and few things hold any real challenge to me.

Since the dawn of time there has not been a bubble that has not burst, and each time there is a bubble it is filled with experts able to say why this will be different this time.

Without fail they have been wrong.

The current head of the BOE has promised us that:

Mr King is nervous that homeowners may not realise that although low interest rates make mortgage repayments affordable, high inflation will not erode the value of their borrowing, as it did in the 1970s - and when they do catch on, house prices will plunge.

House Prices area a matter of opinion, debt is real.

Economists are not the experts, business men are and Goldman Sachs took a short against GB PLC this year citing our housing market as the main reason.

America is crashing, Spain is, regions in Australia are...

It's never different this time, it is always the same.

I just wish that my friends languishing with mortgages that they struggle whilst in negative equity had listened to me, not people like you.

The crash is amongst us, look at the transaction rates, how many are selling...? It has hit a brick wall.

On a final note, I saw by your last reply that I had upset you and for that I do apologise.

Speculative markets are messy, when it's about housing they are emotional times and I know that it must be difficult.

But to kid anyone that this has been about housing is wrong, it has only ever been about the sale of debt to the UK population, hiding it as wealth and then selling that debt abroad.

Economists are always right, up to the point that they become wrong.

It is the way of bull markets and much like Bart Simpson who wouldn't learn that the cake was electrified by Lisa’s science experiments too many people will just never learn

"INSERT NAME HERE"

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Now, shockingly my words do seem a little argumentative and he did reply again...

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I'm sorry "INSERT NAME HERE", but that's one of the most bizarre set of arguments and use of statistics I've come across, but we'll have to agree to differ. As I say, the MPC did not set out to boost the housing market but, as the quote from Lord George makes clear, it was a by-product of action to boost domestic demand, as I said. Everything else you said was, frankly, economic and statistical nonsense, including your definition of recession.

Just one thing you should know - and this is a common misconception - 90% of mortgage equity withdrawal is not spent, but saved. The reason is that MEW mainly occurs when older people sell up and downsize, or move into a home. There's plenty of literature on this.

As I say, you don't know what defines a recession, what the difference is between debt and the money supply, etc. If you're a clever chap, why don't you take the time to research these things, or you'll just go on making a fool of yourself? I don't say this in a nasty way because you seem genuinely interested in debate.

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Now, I deserved the dig, I called myself a clever chap... But I am in my own way... and can I be honest....?

Krusty has only ever referred to housing, you can forgive her to some extent that she did not understand that greater economic pressures... But this guy is an economist and he must have know that speculative gains in a market that replied on exponentially increasing amounts of money being borrowed could not have gone on forever.. He must have know.... Why has he always said what he has...? Can he have believed it??

I replied:

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The trouble is that you may have read the reports of lord Edward Georges comments and not his rebuttal to these reports.. His actual words were chilling... And it’s not like old mervyn king has been highly positive...

The economical tripe that I am speaking is actually accurate.

Look the whole miracle economy has been based solely on the massive take up of debt, and this has never once been about housing, it has been about the sale of debt. Fact

I can talk of boom and bust, and list economists who seem surprised each time.

I can show you thousands of new build flats littering the cities, un wanted and not needed...

I can show you people I know in negative equity, unable to sell or rent it out for enough to even cover a proportion of the mortgage. People who would be tens of thousands less in debt had they not jumped due to the mis information that they had...

Negative equity is a nasty place to be, and at the moment people are entering into staggering levels of debt that they don't really understand...

Mew is huge, but you misunderstood, when I said that it was about 11% of the money spent into the economy in 2003 it was... And you can chart the hundreds of billions being injected into the money supply straight from the ons... As I have...

700,000,000,000

There are 150,000,000 stars in our galaxy I can't even say that the numbers are astronomical anymore...

I am not making a fool of myself, I am fully aware the M4 money supply is not a cashpoint at a motorway service station...

And I have friend who has just bought a flat in Cardiff for ninety thousand less the it was bought for in 2004

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He Replied:

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"INSERT NAME HERE",

I'm sorry to have to be harsh but I knew you were out of touch with reality, but I didn’t quite know how much. I assumed you were describing the situation of the early 1990s, not the current situation.

This explains your initial very odd comment on the site. The housing market hasn’t crashed, on any measure. The problem is that house prices are rising too much, not that they are tumbling. If that's what you believe, you really do have a problem, the problem of spouting unmitigated tripe.

This correspondence is now closed.

David Smith

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Could I let him have the last word? Could you have...?

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Okay, interesting response and a little angry and I am sorry to have upset you but I think that you will grant me the opportunity to at least respond.

It is a shame that you have not kept with any measured consideration in your last email. That you resort to insults.

That you call me delusional.

The fact is that new builds are dropping in some areas and I have friends who bought in earlier phases of a development who are now surrounded by later phases of identical properties being offered for considerably less than they paid. Or owe (due to some markedly high ill advised LTV mortgages)

This is a very unpleasant situation for one couple who are in the process of a break up. They would rent it if rent would cover more then 2/3rds of their interest.

New build flats dropped on average across the UK last year. So claim the people who built them.

I did not say that the market was collapsing, but there is no magic army of wizards rushing around deciding value. Price is what you pay, value is what you get. And some prices are dropping and some are rising.

The massive £90,000 loss in Cardiff is very real.

But it was bought by a businessman and a scientist, perhaps the loss was made by an economist

You didn't respond to the transaction volume comment, nor did I expect you to.

The housing market has surged under an environment of cheep and loose credit kept artificially cheep by inaccurate measures of inflation. The CPI not measuring either house prices or the debt used to buy them is an interesting approach and if some say that this is a true measure then it is at least open to debate and I would certainly be on the opposing side.

Some out here are very aware of the effect this debt has had on the economy, creating what appeared to be very prosperous times.

This has never been about housing; this has been about the business of lending, supported in an economy which owes much of its growth to the massive uptake of this borrowing.

You say what I say is tripe and perhaps I have not explained myself well enough.

If you believe that house prices are not over-inflated after a period of artificially low interest rates that is where we differ and I accept that.

If you believe that the sub-prime and fraudulent borrowers out there will be able to maintain their debt now interest rates are heading back toward long term averages then that is again your prerogative.

If you believe that they make up only a fraction of borrowers then they do, but they are in the highest fraction of LTV out there and 1/3rd is a fraction.

If you think that there is actually a shortage of housing that is not created by speculative belief in price gains then that is not either my experience or belief or my findings.

If you have not seen the headline news of the empty new build flats all over the country I would recommend that you look into it, it is frightening.

If you do not believe that it is possible for someone to pay less today for some properties then they would have two years ago then you and I disagree, I do accept that you can also pay more.

Rents are dropping where I am, and the voids are increasing.

That is Kensington in London.

But this is not about isolated areas, this is about a market.

I believe that it is a speculative market. When I first approached your site I thought that Lord Edward George's comments were relevant and I still do. I also said that we have more homes per head of capita then we did last time and we do, and the recession comment, I was there last time as I am this time if the figures that you see and I see are different then that is where discussions come from.

I have an easy approach to this; I do not have a reputation that is now intertwined in believing that the biggest boom in the world's history will be the first not to burst. I just have a casual interest.

I do believe that I am right, but I was not offered any counter argument.

Only abuse, to accuse me of saying the whole market is crashing when I mention two examples is childish, the examples are valid.

By the way, the whole market is crashing...

But you will discount all I say, not with argument but with disdain and I am sure that you will be able to laugh at my perspective with your colleagues.

But consider this, if Newton was not a physicist but was instead an economist he would still be sat under a tree surprised at each time an apple landed on his head and working on his theory of davity, the flying apple.

It is easy to be right in a boom, embarrassing to be caught out by the bust.

Quite frankly embarrassing.

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So it was left. The last email was sent by me on the 17/07/2007

I never heard back from him again.

Now, I was not right in everything I said... But it does seem like I had a magic 8-ball

The names (mine) have been changed to protect the innocent.

Thought you might find the thread interesting...

Don't judge me too much

Regards

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============================================================================

A particularly interesting post as i had a similar exchange of views (nowhere near as in-depth as yours) with this font of all knowledge, which i have mentioned on another thread. He is a very prickly character to disagree with. It matters not if you are mannerly in your argument, he soon resorts to being rude simply because you don't defer to him. This is a man who is apparently desperate to be right and to be seen to be right. After all, his whole reputation depends on it. His manner quickly becomes patronising and supercilious and there is always an edge. He scoffs and scorns. You, of course, are completely in the wrong on EVERY count and he can do no wrong. He will argue black is white and ignore or deny the iirrefutable. It may be that he is in complete denial. I found him an annoying person to have any sort of debate with and i am not surprised that he gave you a "correspondence closed" conclusion to the "debate". (Which suggests you were getting to him and probably exposing the frailty of his argument). An obnoxious, objectionable, self important and annoying man. I have had a couple of similar debates with Peter Hitchens about various things on which i disagreed with him but still finished up quite liking him and being persuaded by him. Hitchens says what he believes; Smith seems to spout what he would like to believe but of course i could be wrong. Wouldn't be the first time.

I gave up with to and fro-ing with Smith and eventually suggested we let the whole thing stand the test of time. Somehow, i have the feeling you may be emailing David Smith again in the not too distant future.

[Guest mSparks]

Reading the replies, his poorly supported arguments, it's little wonder we are in this mess. Makes you realise how very, very fortunate we are here in that we can see a path through all this utter nonsense. I fear yet again we will be in the minority.

A lot of folk are going to be very confused and badly hurt.

The worlds a minefield, If the majority of people had a map of the minefield they would move the mines.

[Byron]

Soon there will a lot of very angry people out there wanting to know what happened.

Seems to me that you have the start of a best selling book there

Congrats

[Guest An Bearin Bui]

Thanks Apom. What's really interesting is how quickly these self proclaimed experts

are prepared to collapse into personal attacks. He didn't put up a single logical argument,

sad really that this type of person should get so much press/air time.

.

Could you just reply one more time with "I told you so"

.

ST

Funny because I had an online altercation with him myself around the same time last year. He had yet another article in Times positing the same old tripe about supply and demand keeping house prices high and that the UK was a crowded island so it would never see a HPC. The article got a flood of comments and I wrote in asking him how he would explain Japan's housing bust then since they had an even greater population density than the UK?

He actually responded back to me in the comments section (very odd as the Times journalists rarely do that on the news site) and said that I was wrong and that Japan's problems were of an economic nature(!) and entirely different. I responded back again and said that in fact Japan in 1990 and Britain now were actually very similar stories with high rates of public and private debt and said that he needed to face reality about the importance of credit supply being the true driver of house prices. He never responded to that but by then his article had about 120 comments so he'd probably given up.

I would love to find this article now and retrace the argument but there doesn't seem to be any archive facility on the Times site (convenient...) so I can only cherish the memories from afar... those were the days, when the crucial importance of credit supply to feed housing demand was only mentioned by kooks and trouble-makers! I would love to have a record of that exchange... oh well, thanks for the memories, David - you are the Irving Fischer of our times...

Select Irving Fisher quotes:

Stock prices have reached what looks like a permanently high plateau

- October 1929

The market is only shaking out the lunactic fringe

- October 21st, 1929

Security values in most instances were not inflated

- October 23rd, 1929

[Lone_Twin]

It's not about cause, which as you say is common.

His comment seems to imply that prices can't be dropping, unless we are 'seeing' a recession. In fact we 'see' the price drops before we 'see' the recession statistically. So for all intents and purposes, if you expect to see a recession before you start fearing a crash, you will always be wrong. Indeed, you will be David Smith.

Hi Durch, wasn't criticising your post which was acurate. I just think its worth always coming back to the fundamentals.

http://boards.fool.co.uk/Message.asp?mid=11028303

Worth a read seems DS has been deleting a few embarassing lines.

That's scandalous! Unless we want to slip further into an orwellian distopia where history can be revised at will we need to nip this in the bud. Co-ordinated comment posting frenzy anyone?

.

ST

[Killer Bunny]

Somehow, i have the feeling you may be emailing David Smith again in the not too distant future.

Do you think you could in future not put in the WHOLE post the next time?

[JustYield]

Ahh, that David Smith. I remember him:

http://www.housepricecrash.co.uk/forum/ind...&pid=840080

David Smith is a condescending, supercilious smug, middle class, lightweight bland filler journo in a second rate daily paper in a past-it country.

PS. I don't rate him.

I do hope he reads this site.

[Converted Lurker]

You've made a complete fool of him with your reference to Eddie George. Indirectly that tells us the level of his understanding, on where we're at and how we arrived here. He's locked into his incorrect assumptions, and that is all they are, assumptions, as proved by his zero research on the subjects he opines on. He's a complete fraud and you have wiped the debating forum floor with him.

[SeenItAllBefore]

I think David Smith thoroughly enjoyed his position as one of the most extensively read economic commentators and, because his profile is so high, he is now finding it unpleasant having to confront the idea that he might actually have been wrong these last few years. What puzzles me about his position is that he wrote this article for the Sunday times nearly 4 years ago in which he kicks around various ways of estimating how over valued the market was back then and even the most optimistic measure he considered, comparing prices with GDP per head, suggested 20%. He concluded back then:

Housing is clearly overvalued. How does it come down again? The debate is between the crash school and those who foresee years of soggy stagnation for the housing market.

I’m in the soggy camp, mainly because I don’t see the triggers for a crash: a sharp rise in interest rates or a dive into recession. But something has to give and may already be doing so. The soggy period is under way — I hope so, at least.

http://www.economicsuk.com/blog/000141.html

Now, for me, the way transaction volumes collapsed in the year after he wrote this despite interest rates remaining at historically miniscule levels was a clear indicator that a hell of a lot of people were only buying property because they expected immediate capital growth and, as the message they were receiving from the media was that that they weren’t going to get it, they didn’t want to play any more. If this wasn’t a clear enough signal that the housing market was in the throes of a speculative mania the 2 year period from summer 2005 when prices rocketed even further out of line with any historical benchmark you care to mention should have been. And yet, even now it seems, he refuses to entertain the simplest explanation - that there was a bubble in the market, one that is now bursting.

The reason I find his stance interesting is that bubbles are, in the end, psychological phenomena that some people are susceptible to and others aren’t. As a for instance in the OP he trots out the following to support his position:

Household debt has risen, but so have household assets - the net financial position of the household sector is strong - assets exceed liabilities by around five to one.

To me that is a completely circular argument that has been proved worthless by every previous debt-driven speculative bubble that has eventually burst, but not to him or others like him.

Anyway, if he thought prices were likely 20% overvalued in 2004, how much of a correction are we in for after the further rises of the last 4 years?

[Um_Bongo]

His forum is a great laugh!!

Here's a quote from him in the "Housing market bears are in retreat" thread:

Fair point, though you don't expect "the biggest financial shock since the Great Depression", to quote the IMF, around the next corner. The weakness of the bears' case, by the same token, was the belief that the housing market would implode under its own weight without any external shock.

So first he discards the IMF like a piece of tissue paper then sets up a straw man "bear" who reckons that the house market "would implode under its own weight". I bet he can't provide a reference to anyone actually saying the above - and he conveniently forgets all the real reasons for a crash which have been pointed out to him - the OP's email correspondences being an example.

BTW, the post is here

[SeenItAllBefore]

His forum is a great laugh!!

Here's a quote from him in the "Housing market bears are in retreat" thread:

So first he discards the IMF like a piece of tissue paper then sets up a straw man "bear" who reckons that the house market "would implode under its own weight". I bet he can't provide a reference to anyone actually saying the above - and he conveniently forgets all the real reasons for a crash which have been pointed out to him - the OP's email correspondences being an example.

BTW, the post is here

But the housing market has clearly collapsed under the weight of all the debt secured on it. No external shock there.

What is he on about?

[GBdamo]

I have an easy approach to this; I do not have a reputation that is now intertwined in believing that the biggest boom in the world's history will be the first not to burst. I just have a casual interest.

Nice one

Damo

[jac]

david smith is talking rubbish... again!

i've just checked the data on the ons website (ybez = gdp) and house prices on the hbos website

GDP contracted in 1990q3. ok there was a combination of financial crisis and iraq war pushing up energy prices. but...

http://www.statistics.gov.uk/STATBASE/tsda...ore=N&All=Y

house prices began to fall A YEAR EARLIER june 1989 - worksheet allmon_sa

http://www.hbosplc.com/economy/includes/08...storic_data.xls

i guess david was looking at annual yearly changes or something ridiculously backward looking

i had a row with him a year ago about unemployment. he said it was rising so the mpc didnt need to raise rates. i referred him to less volatile data showing unemployment was in fact falling and the mpc needed to keep on hiking

but that's the nature of the business. you have a view. you defend it. ultimately you need to change it

the fact is though that HOUSE PRICES FELL BEFORE THE ECONOMY WENT INTO RECESSION

it doesn't mean it DROVE it into recession - there was the iraq war which caused a rise in global bond yields and a reduction in global stock markets/increased uncertainty. but the economy was weakened by the bursting of the previous housing bubble