I have been a consistent and long standing pessimist on house prices, most often in the face of experts asserting otherwise. By chance I recently came across 'Financial Outlook 2008' in the Telegraph online edition. The most interesting thing about this is that, with remarkable honesty, in addition to current predictions they provide a link to the predictions made in January of 2008. It makes interesting reading and illustrates perfectly why I am so cynical about the experts. The link for the predictions can be found here.
You can compare what I have predicted with the experts. Whilst I was predicting a housing crash, and a drop into deep economic disaster, and the UK falling off an economic cliff, you can see the somewhat sunnier picture of the experts (I will paste in my prediction made in November 2007 at the end).
On the house market we have the following samples from the experts:
Stuart Law, chief executive, Assetz says ''Professional investors will generally take a medium to long-term view of the market, and reasonable predictions forecast good growth over this longer time frame, making any short-term price wobbles irrelevant'. He suggests that over 2008 house priced will stabilise, rents will go up, and inflation will be stable. His recommendation in January is to buy into the market for buy-to-let. Happily, this person whose advice is so wrong does not appear in the more recent financial outlook section. However, I would gamble that this 'expert' is still in his job and still getting it wrong. Despite writing something which is fundamentally wrong, Assetz have the following on their website; 'Assetz® is a group of well known and successful property investment advisers'. I wonder how they define successful advice?
To Stuart Law's prediction we can add CML who predicted a 1% rise, though they at least acknowledged that the credit crunch would have an impact (there it is again, the magical beastie the 'credit crunch'). The only remotely sensible prediction was from the Halifax who suggested that transactions would fall back, but then (at that time) I guess that they would have known this as a result of their own internal policy discussions (as they would have known that they were about to severely tighten lending criteria). However, they only predicted a 'softening' in house prices, and even then focused on some regions, not the whole market. Most of the forecasters justified their predictions through suggesting that housing supply constraints would help to maintain prices.
Not all predicted a sunny year, but all were a long way from predicting the carnage that is taking place in the housing market at the moment. I strongly recommend following the link provided and taking a look at the predictions. This will be a real education on why you should be careful of the so-called experts.
As for my prediction, made in November, in 'A Funny View of Wealth' see below:
'The slow fall in house prices will accelerate into a full blown crash, with February or March being the months where the falls really start to accelerate. In the six months that follow prices will drop by an average of 20 - 25%, as buy to letters panic and sell into a falling market. In part this will be a response to the fall in house prices, in part it will be due to increasing difficulty in renting their properties (though this factor will lag the price drop)'
I quote myself here, not to be smug at being correct (I would rather have been wrong) but to point out that all of the information was 'out there', even for a non-expert such as myself. So why did so many get it so badly wrong? I do wonder whether the problem is not just that these experts follow a herd mentality, and never actually think for themselves. This does create one puzzle - who is leading the herd? Or is it more like the flocking behaviour of starlings, where each bird just looks to the bird beside them, and reacts to their movement?
In either case, we should treat the opinions of these experts with extreme caution. For example, the Economist magazine gives a forecast for various parts of the economy every week (at the back of the magazine), based upon a poll of forecasters, or the Economist Intelligence Unit. I happen to have the June 21-27 2008 issue next to me so will use this issue, and note that the prediction for UK GDP for 2009 is +1.4. Compared with even a couple of months ago this is very pessimistic, but still shows no acceptance of the depth of the severity of the current crisis, let alone managing to see that the root of the crisis is structural. It is also a great indicator that these so called experts are largely reacting to current events, rather than understanding the underlying causes of economic change/activity.
This lack of understanding is rather puzzling, as all of these economists will have presumably hold doctorates in economics. I really can not see how they can not see the structural flaws in the economy - unless they are following the same herd/flocking behaviour that I have mentioned earlier. At present, if we accept the flocking principle, the flock appears to be moving towards the point of view of a quick shallow recession. I wonder when the shift of the flock to accepting that there is a crisis will occur? Probably when the economy is already on the floor......
A note: I just remembered a conversation I once had with an estate agent over prices a couple of years ago. I remembered this whilst reading about 'supply constraints' being used as a justification for prices remaining stable. The agent (no surprise) was basically saying that there was no upper limit on house prices, on the basis that people would always need somewhere to live. I then painted a scenario for the agent (something like) as follows:
'Imagine a situation where there is no free health care, and no medical insurance. Imagine that you have a fatal heart condition, and that the fee for correcting the condition is £1 million. You have no more money than you have now, and have no potential to earn more money than you have now. Will you buy the operation to fix your heart?'
The answer, of course, is that even if your life is at stake the price is simply unaffordable. In other words, however necessary it is to have somewhere to live, if you can not afford to live in a house because they are too expensive, no amount of saying it is necessary will allow you to afford something that you simply can not afford.
The agents thinking process seems to illustrate perfectly how unsupportable bubbles grow.