Thursday, May 22, 2008

Dodgy economics dressed up as accurate models

House prices: a bumpier ride lies ahead

This looks like a case of two economists being wise after the event - suddenly switching their forecast to price falls, though not by very much. These two produced a model which was suspiciously close to the actual growth in house prices. But they talk as much waffle as the VIs: eg "Systematic and comprehensive models are needed to distinguish fact from fiction in claims such as those made at the time by the OECD and IMF"; "pent-up demand...";"fundamentals of strong growth in real income". Even academics resort to bullsh1t.

Posted by letthemfall @ 11:00 AM (1054 views)
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13 thoughts on “Dodgy economics dressed up as accurate models

  • Lets debunk them one-by-one …

    “The first is pent-up demand from buyers priced out of the market in recent years”

    So a drop in demand means higher house prices? And a rise in demand means … oh, higher house prices! That’s fortunate isn’t it.

    “and continuing (more modest) population growth.”

    Erm. This is incorrect on so many levels. Does the author realize what is happening to Polish workers affected by the plummeting pound? Did high population save house prices in Japan?

    “The second is that, with UK housebuilding so low and unresponsive to house prices, the effect on economic activity of lower levels of residential construction will be small.”

    How is housebuilding unresponsive to house prices? That’s a non-sequitur. There is a glut of new build properites still half built, which when completed will have to be discounted sharply for the housebuilders to break even. Unresponsive? In your dreams – they have bills to pay!

    “The third factor is the policy response. Many analysts still believe UK interest rates will tend to follow US rates down.”

    Oh, yes. The MPC seems very keen to follow the Fed in the race to the bottom of the interest rate cycle at the expense of runaway inflation. Oh yes – they said something like that last week, didn’t they?

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  • Even in their own article which they link to, they make predictions which have already been proven utterly wrong, and based on questionable analysis:

    “Needless to say, still gloomier, though less probable, scenarios can produce national house price declines.”

    “Since cash from property investment trusts will be injected into the market in 2006” (did they mean REITS? Oh dear.)

    “We find that only quite dismal scenarios – more dismal than any now contemplated by mainstream forecasters – would produce falls in nominal house prices”

    Foisted on their own petard is the expression used here I think.

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  • I’ve just recalled something they wrote in their original report about interest rates having to rise to 6.5% or thereabouts before prices would fall. What has happened to mortgage rates? So in that sense they have got a prediction right (sort of) although they were clearly thinking of base rates. What would we do without these clever econmists?

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  • Landedgentry says:

    “As ever, forecasting is fraught with difficulties”

    Especially when the outlook is one that you don’t want to believe in.

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  • I’ve been following these numpties for a little while now. Completely clueless, imo.

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  • These two validate one of my favourites; “those who can’t, teach”.

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  • need-a-crash says:

    @1. Nice one Paul.

    May I add that the “Pent-up demand” that we are hearing so much about, which of course is FTBers like us, only exists because we’ve been priced out of the market by speculators. Remove the speculators (which is starting to happen now) and we will replace them, therefore there is no EXTRA demand just one group replacing another.

    I also notice this article seems to suggest HP growth up to 2005 was rational. For a long time I’ve thought this HPC will take us back to 2005 prices, however that is a fall of 25% and not the 10% this article talks about!

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  • I was going to say more but Paul said it all. One other point, though. These people write that OECD and IMF charts and ratios are not very informative (in explaining house prices and whether they are overvalued) because these charts and ratios ignore IMPORTANT factors including HOUSEBUILDING. Later on they write that UK HOUSEBUILDING is low and unresponsive to house prices and the effect on economic activity of lower levels of residential construction will be small. So how come HOUSEBUILDING is an important factor in house prices?
    Interesting that they regard the availability and cost of credit as one of the “fundamentals”. It’s obviously a major factor but I thought it would be too volatile to be a “fundamental”. What’s the difference between a fundamental and any other factor that affects something anyway?
    doomwatch – you could add that those with nothing to say dress it up with jargon and ‘systematic’ models.

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  • 1. The only demand in the past 2 years has been BTL… and that has vanished

    2. Demographic pressure has been the Labour big lie. That means immigrants from the new EU countries who have helped grow the gross GDP, but at the expense of the GDP per capita, which has declined.

    True that the immigration influx has had a big impacts on all sort of costs, from housing to health care to transportation, but the duo of charlatans who wrote this article (if you add Professor Nikel you make a trio) are an example of the moral rotness of the Labour thinkers. There is nothing right in refusing to build infrastructure and houses then to rejoice when prices go up, maybe increasing the number of people on benefits.
    But these losers are going to be wiped out by the recession that they have caused, and now blame the US for exporting. LOSERS!!

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  • letthemfall says:

    Bear in mind too that it is one thing to produce a model that fits past data, quite another to get a model to predict the future, especially in economics where just about all detailed models fail. But that is academia for you these days: grab funding where you can, publish any specious nonsense you can get away with.

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  • From what I have seen whilst I was at Oxford, the quality of a lot of economics fellows is quite poor (not all mind you…I knew some really good economists there too). It seemed to me that the calibre of junior economics staff/tutors was lower than in other departments. Most of the good younger economists get sucked into the city or similar. I think it was 2000 in which none of the top 8 economics departments had a single British first class honours student who stayed on for a Ph.D.

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  • Paul – Ahem… it would be remiss not to point out that whilst this site was warning of impending doom in 2004/5/6, this bunch thought prices would continue to rise. Remind me what happened in that period? Who was wrong exactly?

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  • d’oh – which college?

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