Archive for September, 2004

Looking back at the past few days of turning point in the data reporting on the housing market a thought crystallized that I’d had for a while. There are just too many housing market indicators in the UK. The press dutifully reports them all on the way up, and will do the same, perhaps with even more vigour, on the way down. Current market levels were justified, as is typical in bubbles, with the argument that “it is different this time” (see earlier post on Bath.) But I wonder if what is truly different (among other things) is the constant reinforcement that the plethora of rising national house price indices has provided. The number has multiplied since the last market collapse, when only the Nationwide and Halifax generated much in the way of column inches. If this has been a contributory factor in the scale of the gains, now the numbers are turning negative it may accelerate and deepen the scale of declines as sentiment gets hammered upwards of six times a month. We know from behavioural studies that it is the frequency of losses or gains not the scale that affects our sentiment and investing judgement. Markets are volatile, so staring once a day at one’s portfolio price on the internet or in the newspaper is a recipe for investment disaster. Look too closely at the data and you see noise, not the drift rate. So the short-run perception of the housing market will be worse than reality and this will further discourage buyers. Who’d want to look stupid by buying? An example of bad maths, or money illusion, call it what you will, appeared in the FT’s Lex column today, where they concluded a review of the housing market by saying that the much touted potential fall of 20% would simply reverse a year of gains. However, as most schoolchildren should know a 20% increase on 100 is 20. But a 20% decline on 120 is 24. House prices locally here in Bath have risen 156% in the past five years. Remove the more recent furious levels of demand, and it must surely be anyone’s guess where the equilibrium level might be. Interesting that studies are coming out trying to delink housing prices from consumer spending. I assume these are to influence sentiment and show that just because house prices are falling does not mean the consumer economy will contract. This suggests a lot of worry in high places. However, I hope they are right.

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News from listed UK estate agency Countrywide today is worrying, although how worrying remains to be seen. August trading was down 20% on last year’s “exceptional” levels, suggesting that to all intents and purposes housing market activity has fallen off a cliff. Surveying business fell 29%. The trend is continuing into September, so this is not a seasonal effect, as some were predicting. Unfortunately I don’t have figures for how strong August 2003 was, but it probably was a pretty good month, as the market was perhaps more active than it might have been, because so many people had avoided buying during the height of uncertainty caused by the Iraq War. It no doubt suits Countrywide’s purposes to paint a grim picture to the City to manage expectations down as quickly as possible. However, this is the second such warning in as many months. Behaviourally, it is the frequency not the size of bad news that we respond to, so for investors it is better to tell them about losses all at once, and smooth the good news with steady earnings growth. So on that basis, it does not look good if they are further revising down their outlook. Perhaps the phones have been dead in September. Nonetheless, we continue to hear of people viewing property. The news arrives on the same day as renewed IMF warnings that the economy is vulnerable to a housing market collapse.

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John Allen Paulos, US maths professor and author, alludes in “Once Upon a Number” to a rather interesting recent branch of academic research. In effect, the point is that certain phenomena don’t occur until enough connections have been made in a system. However, once the connections have been made once, a given phenomenon tends to recurr rather than not occur. Paulos suggests this could explain the proliferation of certain psychological and social dysfunctions, which result from their description by the mass media. Imagine that the internet must have a more profound impact by connecting the disparate ingredients to create such malign, as well as benign, events.

Having done a lot in my past to create certain types of human networking with surprising and unexpected results, I’ve always felt that I understood the al-Queda phenomenon better than most, without having studied it closely. One has always to be careful with such conceits, because hindsight bias–the belief that we would have spotted the unexpected had we been there–infects everyone, so I’m a little cautious of appearing some kind of “I told you so” ass. But, having steeped myself years ago in Manuel Castels Castells books, seeing the viral effect of my wife’s environmental campaigning in the 90s, the impact of instant messaging on Bridge editorial in the late 90s, and the quasi self-organizing anti-capitalism protests and UK fuel protests of 2000, I’ve long had a fascination with network effects and the difficulty of those used to the hierarchical application of power and control to grasp what is happening, evening if they know and understand the term.

Paulos’ description rings some bells in relation to Stephen Jay Gould’s concept of evolutionary stability followed by bursts of sudden change, rather than the steady linear path that the word evokes, in contrast to the term revolutionary. Apart from al-Queda, the role the internet is playing in Iraqi militancy/terrorism/hostage-taking, perhaps has a lot to do with this. It is a worrying escalation, because the old currency of publicity is devalued by the more extreme form of shock available to the protagonists. It seems to me that while mainstream media cannot show the act of murder or death, the photos or video clips of the victims prior to execution evokes a fairly high level of horror, and it is immediate. In the competition for media attention, the ante has been upped for all. It is probably also a very bizarre form of tragedy of the commons.

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It is no doubt commonplace in certain conurbations that have both natural and particular socio-economic advantages for people in those housing markets to declare that “Bath is different” if ever they are confronted with the notion that prices may fall. I consider this to be an example of the “endowment effect.” Namely that what I own is worth more, because I own it. The same person trying to buy the same item would consider it overpriced. The endowment effect is partly responsible for the ratcheting effect in housing markets as elaborated by Andrew Farlow, although other biases also come into play here too. Essentially the seller’s bias stops the market easing naturally to where the buyers are, and therefore generates the kind of sudden collapse in confidence that seems to have occurred recently.

Although it is early days, the Bath Chronicle, citing a leading local estate agent, seems to be putting the lie to the argument that Bath (Oxford, Cambridge, Winchester, wherever) is different, as prices for some types of property reportedly have fallen 15% in the past three months:. This does not represent a collapse though, we are reliably informed.

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Challenging one’s biases is an important part of my reading experiment, so here I am reading Anatole Kaletsky, whose piece today defends his earlier assumption that we are not in a housing bubble. He points out that the housing market doomsters have gone all quiet. I don’t think he is correct, because my perception when reading between the lines is more and more commentators are hedged with some prediction of price falls, while asserting that “a gradual slowdown” is the likely outcome. Kaletsky’s point is really that a weaker housing market won’t injure the economy. What will injure the economy will be necessary tax rises if Gordon Brown continues public spending at current levels. The private sector, which Kaletsky says is growing at the slowest rates since the early 90s, won’t be able to support it all. So one way or another bad times ahead, just dispute over the causes.

This is a little bit confusing as he is normally very bullish on the economy. I don’t read the Times at all regularly, so when I read his stuff I also always try to give him the benefit of the doubt, because he is one of the few journalists that Taleb has any kind words for in Fooled By Randomness. Contrast Kaletsky’s view with the more empirical Didier Sornette, whose praises I’ve heard Taleb sing.

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