The insatiable demands from the 24-hour financial media mean that every event needs a fundamental explanation. In effect, markets are trading "noise" rather than fundamentals. A noise trader, of course, doesn't much care if the facts are correct, so long as the person the other side of the trade does. In such markets the facts become "true" regardless. So far, so harmless. It becomes dangerous, however, when the fundamentals invented to suit the noise become accepted as facts, and people try to invest on this basis. This is where bubbles build.
Alfred Marshall, the 19th-century economist, once said that any short statement about economics was wrong, "apart from this one". The same logic appears to be applied to predictions about house prices. Everyone else's predictions of a house price collapse may have been proven wrong, but mine must be right.
In the wake of the Nationwide house price survey revealing that prices slipped by 0.4 per cent in September, the housing bears are back on the prowl. David Miles, chief UK economist at Morgan Stanley, said last week he could not rule out a 20 per cent to 25 per cent fall in house prices. Martin Weale at the National Institute of Economic and Social Research said he would not bet against a 20 per cent to 30 per cent correction. And today Roger Bootle, chief economic adviser to Deloitte, will emphatically rule in a 20 per cent fall in house prices over the next three years.
The Bootle prediction has to be viewed against the context that he predicted this at least twice before, and prices have risen by more than 20 per cent since he first became a housing bear. As for Professor Miles, he advised the Treasury that home owners should take out 20- or 25-year fixed-rate mortgages. The reaction of the lenders was that the rates they would have to charge for those mortgages would precipitate a crash.
The housing market suffers from a form of prediction indigestion. Economists believe in rational markets, yet UK housing does not behave in accordance with their models. The models cannot be wrong, so there must be something wrong with UK housing.
But all these predictions fail to see that the biggest driver in the housing market is the most fundamental building brick of economics - supply and demand. Throughout the south-east of England, and in large areas around the rest of the country, there is simply not enough good housing stock to satisfy demand.
In the UK, families are used to living in houses with gardens even in the middle of London, and will pay for the privilege. Lack of spare land, tough planning laws and the Nimby tendency mean this imbalance will not change in the short term. It is a principle Alfred Marshall understood.
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