Comments: The verdict on Brown: could have done better

Hi David

FWIW - a comment or two.

"Critics say that this stability on the surface conceals instability beneath, most notably for house prices, and that the rise in private and public-sector debt is storing up serious problems for the future." You don't say? Gosh!
The fact that the paragraph is so hidden, most ignoramuses will by-pass it. By design?

"Bank of England independence, the single most enduring achievement of his chancellorship." On the second day of tenure then downhill all the way - hardly sterling (!) stuff.

"Who will switch sides in 11 days to give us the rise in Bank rate from 5.5% to 5.75% that so nearly happened earlier this month? "
Er, didn't you repeatedly say or imply IRs peaked at 4.75% or was it 5%? In any case, the MPC nor the govt control UK Plc - as you know (or ought to) The People's Bank of China, Bank of Japan, Federal Reserve and international merchant banks - Goldmans etc - control our economy and in that order. Global inflation cat is very much out of the bag, US treasuries are now on secular rise so UK IRs are going to 6.5%, 7% probably and 8% possibly. My summer bulletin will be out in the next 2 or 3 weeks and I shall explain there.

The HPC - that you have scoffed at for ages - will be massive. Unemployment will soar (also due to global uncompetitiveness), repos will soar, personal insolvencies will soar.

BTW - it gove me no pleasure - I am merely an economic rationalist. I do not sell papers. I sell a wealth management service - unlike the vast majority of financial advisers (sic!).
Kind regards

Posted by Jonathan Davis at June 24, 2007 12:19 PM

"The People's Bank of China, Bank of Japan, Federal Reserve and international merchant banks - Goldmans etc - control our economy and in that order."

Jonathan, I'd dispute that order. I'd say it was BoJ first.

Posted by Richard at June 24, 2007 12:26 PM

You'll be saying next it is all an international conspiracy. This really is paranoia of the highest order, though it doesn't particularly surprise me, irrational argument of the Private Fraser "We're all doomed" school, and about as far away from economic rationalism as it is possible to be.

Posted by David Smith at June 24, 2007 12:47 PM

Rather than call Jonathan paranoid, why don't you answer his points. Alternatively if his post is a mad paranoid rant, remove it. But just attacking the man as paranoid without examining his points is the Bill O'Reilly school of jounalism :-)


Posted by Kyle Exwhy at June 24, 2007 01:26 PM

Speaking of international conspiracies It would be interesting to hear David's view on Brown's plan for a 'new world order'?

Posted by Joseph Smith at June 24, 2007 01:26 PM

All the house price crash arguments have been addressed, over and over again on this site. Just glance across to the discussion forum or look at some of the previous comment threads, for example, those on "end of the house price boom in site". If anybody has got a new argument, please provide it. What amazes me is that people who have got this so badly wrong year after year - dating back to the very early 2000s if not before - are not embarrassed to trot out the same old stuff.

Posted by David Smith at June 24, 2007 01:33 PM

The word conspiracy is emotive. That the political and financial elite control the strings is not to say there is a detrimental conspiracy but simply that those up top will do whatever they need to do to retain their positions e.g. the Goldmans, Warburgs etc e.g. setting up AND OWNING the Fed - but of course you knew that. £8Bns bonuses is no coincidence - and that's only the public figures. That China, Japan, Russia, Kuwait etc are owed SO MUCH money by the US is what I mean by they control the economy of little UK. As US treasuries rise inexorably will / has put a halt to property rises and private equity which has propped up stock markets. Ipso facto. Only the banks prepared to lend at very low rates trillions of dollars (!!!) has allowed the madness of markets to continue these last few years.

Also, as I have said before, the inept IR cut of 08/05 is the sole reason why the HPC is not now in full force. Look at the charts and approval stats in H2 04 and H1 05.

I am certainly not embarrassed to try to stop people making the biggest financial mistakes of their lives.

When it all hits the fan, there will be millions in financial penury and heavily indebted, long term, to the Goldmans (ultimately).

Blinder (ex Dep Chair Fed) said in Davos (were you there?) that 40m US jobs will be lost in the next 10 years. Actually, its obvious how right he is. As the West becomes ever more uncompetitive globally (when the $ plummets below its 30 year collar, c 78 on Trade Weighted) a generational economic winter will ensue - much like Japan since nearly 20 years ago - there's the recent precedent!

You think I'm a Pte Fraser? I think you're a salesman peddling eternal optimism which is irrational.

You write well hence I read you. But boy will you be proved wrong. You and all the other optimists (bulls) have been extremely lucky due to the greatest relative amount of liquidity EVER, namely, buy-to-let investors, bankers, incumbant politicians and unelecteds. Note Wen Jiabao's 4 uns - 'unstable' etc. This is the guy who holds the world's purse strings and he says China is un... in 4 different ways.

Evidently, you and I read different things into what is out there.

On verra

Posted by Jonathan Davis at June 24, 2007 02:04 PM


One of the best posts I've read in a long time, and so true.

Posted by Kev M at June 24, 2007 02:54 PM


You say;

‘Importantly, the variations in growth and inflation rates have been much lower than in the past’

I have problem with that and I’d like to ask you why you don’t question the reasons behind as to why inflation rates have been much lower. Could it be that CPI has been fiddled in order to keep the interest rates down for the survival of miracle economy?

You also say;

‘Not only has there been no return to boom and bust, but the big economic numbers have exhibited an almost eerie calm’

I can see another problem here; Are you claiming that there has not been a boom so no risk of bust or Are you claiming that ‘it is different this time’ so the soft landing will follow the boom? Something that has never happened.

Do you know that 9 out of 10 UK towns are unaffordable to key workers and UK plc owes a third of entire Europe’s debt?

Surely the debt can’t be sustainable nor the fact that millions of middle class families & key workers are priced out of housing market due to Mr Brown’s ‘miracle economy’.

Posted by Alex at June 24, 2007 02:56 PM

Dear David,
I guess it would make sense to talk about UK economic performance relative to the rest of the world in order to judge which Chancellor performed best.
In any case, it is nice to see that both you and your readers rely on economic arguments rather than political ones; the rest of Europe (e.g. France, Spain, Italy and Greece) still judges economic performance by just looking at the government's ideology.
Many thanks.

PS In theory, the Chancellor could ask the BoE to targer house prices (in addition to output growth and inflation, with all the consequences and perhaps lack of reasoning this might have) if public opinion supported this via e.g. a referendum.

Posted by Costas Milas at June 24, 2007 04:25 PM

Costa, when housing slows to nothing, or starts to slide, you bet your bottom sterling it will be added to help inflation stats reduce!!

Posted by Kev M at June 24, 2007 04:34 PM

No, not rational, and usually wrong. I look forward to your next newsletter, and to pointing out the errors and misunderstandings. When was it you sidled up to me and told me the bottom was about to fall out of the buy-to-let market? Three years ago? When was it you first started predicting house price crash? Five, six, eight years ago? So now you resort to Dan Brown type conspiracies. I was there when Alan Blinder predicted job losses as a result of offshoring. Studies of the US software industry suggest he's been wrong so far. I find it slightly disturbing that somebody who reaches so readily for Armageddon theories is in the business of offering financial advice.

Whichever measure of inflation you take its variation has been lower than in the past and lower than in other advanced economies, as the OECD has pointed out. RPI and RPIX include a house-price element, of course. The UK has had the best combined growth and inflation performance in the G7 over the past 10 years. The economy has grown by an average of 2.8% a year over the past decade, and is still growing at that rate. That's not a boom as anybody would describe it.

Posted by David Smith at June 24, 2007 05:15 PM

Just one other point, if this reproduces OK. The housing market was not heading for a crash before the August 2005 rate cut. In fact, as these figures show, approvals were already rising strongly.

Monthly number of
total sterling
approvals for house
purchase to
individuals (in
seasonally adjusted

31 Jan 04 126
29 Feb 04 126
31 Mar 04 123
30 Apr 04 119
31 May 04 122
30 Jun 04 111
31 Jul 04 100
31 Aug 04 94
30 Sep 04 87
31 Oct 04 85
30 Nov 04 76
31 Dec 04 80
31 Jan 05 81
28 Feb 05 86
31 Mar 05 92
30 Apr 05 95
31 May 05 96
30 Jun 05 95
31 Jul 05 99
31 Aug 05 105
30 Sep 05 106
31 Oct 05 110
30 Nov 05 113
31 Dec 05 118
31 Jan 06 119
28 Feb 06 113
31 Mar 06 115
30 Apr 06 107
31 May 06 117
30 Jun 06 121
31 Jul 06 120
31 Aug 06 120
30 Sep 06 126
31 Oct 06 127
30 Nov 06 128
31 Dec 06 113
31 Jan 07 118
28 Feb 07 117
31 Mar 07 112
30 Apr 07 107

Posted by David Smith at June 24, 2007 05:54 PM

Dear David,
In any case, those that criticise the BoE, would probably be the first ones to support house prices directly being targeted by the MPC.
Many thanks.

Posted by Costas Milas at June 24, 2007 06:09 PM

When was it you sidled up to me and told me the bottom was about to fall out of the buy-to-let market?
December 2005 - just after the IR cut. I admit I didn't expect so many people to be SO stupid with BTL in 2006.

When was it you first started predicting house price crash?
2004. I started recommending to people to not invest in 2005 and to actively reduce exposure in 2006. To delay would have meant being in the thick of a stagnant mkt of an iliquid asset class.

I was there when Alan Blinder predicted job losses as a result of offshoring. Studies of the US software industry suggest he's been wrong so far.

It's only been a FEW MONTHS. Didn't he say over 10 years?

31 May 04 122
30 Jun 04 111
31 Jul 04 100
31 Aug 04 94
30 Sep 04 87
31 Oct 04 85
30 Nov 04 76
31 Dec 04 80
31 Jan 05 81
28 Feb 05 86
31 Mar 05 92
30 Apr 05 95
31 May 05 96
30 Jun 05 95
31 Jul 05 99
31 Aug 05 105

As I said, falling to below the important 90k figure. The MPC were terrified. Of course, there will be nothing they can do the next time. Shall we say either Q3 or 4 this year?

Because I see the big picture that's why I know what am I'm doing. On verra.

Posted by Jonathan Davis at June 24, 2007 06:21 PM

Dear David,
To add another (more amusing?) dimension to the (dare I say heated?) conversation, house price inflation would have been much lower if we had chosen to use new and clean (rather than old and dirty) £5 notes as part of our property transactions.
Many thanks.

Posted by Costas Milas at June 24, 2007 07:46 PM

I find it hard to believe you only started predicting a crash in 2004; I'm sure I have something in the office of much older vintage than that - but if that's what you say. The point about Blinder and offshoring is that the US software industry was the focus for these scares a few years ago. Jobs were lost, but have since more than recovered.
I think I may have gently suggested that you and statistics don't mix too well before, and I think you've demonstrated it. If the MPC was worried about mortgage approvals dropping below 90,000 it would have started cutting interest rates in autumn 2004, not waited until August 2005, by which time they were well above 90,000. Big pictures are fine, but they have to be based on something loosely connected with reality.

Posted by David Smith at June 24, 2007 08:01 PM


The Economy might have grown, by an average of 2.8% a year, over the past decade but it doesn’t change the fact that since then house prices have ‘nearly trebled’ as the average earnings, on the other hand, have risen by only 54%. There is clearly a problem here which now shows its social consequences.

You have not made a comment about the fact that our key workers can’t afford to buy homes in 9 out of 10 towns of UK but I am sure there is not any other country, in the G7, where middle class & key workers are priced out of property market.

Is there any other economy, in the G7, that owes a third of Europe’s entire debt?

You also say;

‘The economy has grown by an average of 2.8% a year over the past decade, and is still growing at that rate. That's not a boom as anybody would describe it’

I am afraid I disagree; we are a debt-soaked society that has seen outstanding household loans double to £1.3 trillion in just seven years. If this is not a ‘boom’ I don’t know what it is.

We have bitten off more than we can chew therefore I’d like to ask you if you have any reason to why the biggest housing boom of all time will not end or shouldn’t end in tears?

Posted by Alex at June 24, 2007 09:02 PM

I am afraid the discussion has not touched on other possible drivers of the house price bubble (beside cheap credit):

- BTL property as an investment and pension surrogate. 20% of all property sales were to BTL investors this year, 20%! Beside the tulip-mania factor (i.e. BTL property prices detached from rental yield) there is also the not-so-remote possibility that the government hikes the taxes on BTLs and introduces greater tenant protection (we know how these things work as a pendulum...)

- "artificial" barriers to housing development, by builders' cartel, and speculating on land banks. This is subject to an OFT investigation launched last week

Anyway, good discussion here... David keep up with your good blog!

Posted by Michele at June 24, 2007 09:16 PM

Michele, thanks. Alex, I believe you are new to the site so I'd suggest you have a trawl around, and you'll see I've been over this ground many times before. Yes, UK household debt has risen and is higher as a proportion of income than in most other EU countries - though it's not a third of the European total - mainly because home ownership levels are higher here. Also, household assets (wealth) add up to roughly £7,000 billion, six times liabilities, so household balance sheets are in good shape.

It's clearly not the case that the middle classes are priced out of housing in nine out of 10 towns but there is a problem for lower-paid workers and first-time buyers. Incidentally, I don't know why people always fall into the habit of thinking that "key" workers are only in the public sector and they are the only ones who are suffering. There are plenty of key workers in the private sector and average public sector pay is higher than in the private sector. The solutions to the affordability problem are familiar - more housebuilding in general and more social housing. See the recent threads on the Nickell report on affordability.

Posted by David Smith at June 24, 2007 09:47 PM


You say "household assets (wealth) add up to roughly £7,000 billion, six times liabilities, so household balance sheets are in good shape."

Mmm, sorry to shoot you down, but this is complete nonsense. Housing wealth is notional, it is only based on a price that someone is prepared to pay for a property. As Mervyn King said

"house prices are a matter of opinion, debt is real".

The levels of debt in this country is now at breaking point. We are heading for the mother of all crashes. And I can't believe that otherwise rational people like yourself have your heads in the sand refusing to accept what is staring us in the face: that house prices CAN go down!!

You also said "It's clearly not the case that the middle classes are priced out of housing in nine out of 10 towns but there is a problem for lower-paid workers and first-time buyers."

Sorry, but I earn nearly twice the average salary for the area I live in, and I still can't afford anything other than a broom cupboard sized property without borrowing six times my salary. That is financial suicide.

Posted by Ian Jones at June 24, 2007 10:39 PM

May I ask just exactly what constitutes a 'household asset' ?

And would you like to buy a highy valued tulip bulb guaranteed by the Banque Royale, special price today only?

In matters of the press and government I would suggest more balls and less b******s.

Posted by HarryTheFish at June 24, 2007 10:53 PM

The housing crisis is something that concerns many of us in the private sector. I suggest that the government should make BTL (buy-to-let) less attractive. How about removing the various tax breaks available to landlords? It's hardly rocket science is it!

Building more houses is obviously part of the solution, but we're seeing BTL landlords buying over 60% of newbuild developments in some parts of the country. It seems logical that BTL should be discouraged.

If discouraging BTL directly doesn't work, the government should start moving in on the lenders.

Posted by Mr N Radson at June 24, 2007 11:18 PM


I do not understand how you can so lightly dismiss the very
real possibility of HPC precipitated by the BTL brigade.

With yields at an average 3.6% and capital gains stagnant
or falling in at least 50% of the country; and with London
prices now quoted as dropping by 3.7%, we face a
very real possibility of a serious correction in property
prices. The BTL figures no longer stand up.

With two more IR hikes in the offing, most BTL landlords
will be looking for the exit.

To simply say "this has been predicted for years" just
avoids the present reality.

Nigel Johnstone

Posted by Nigel Johnstone at June 25, 2007 12:35 AM

Hmmm. Unusual traffic about house prices for a piece that isn't even about the subject. Household assets divide roughly 50-50 between housing and financial wealth. You can say wealth is meaningless but that's not very intelligent. For housing assets to be worth less than housing debt, house prices would have to fall by about 70%.

Nigel - "Most BTL landlords will be looking for the exit" - Don't see the remotest evidence of that, and your other statistics on what is happening to house prices are odd, to say the least.

Ian - If the middle classes are priced out of housing in 90% of the country, who do you think has been buying? Only the super-rich? If you're saying middle-class first-time buyers without parental help are struggling that is a different point.

And let me address the myth that I only write that house prices can go up. House price crashes are rare in the UK, and only occur in conditions of overall economic recession - and before you say anytjhing they don't lead the economy into recession (see previous postings and evidence). If economic Armageddon arrived house prices would fall. I suspect, however, that would be the least of our worries.

Posted by David Smith at June 25, 2007 09:09 AM

It's funny how the last recession was AFTER the 1989 HPC Mr Smith.

The hpc led the country into a 1990's recession, not the other way around....

Posted by Matt at June 25, 2007 09:52 AM

By the way, do you have any BTL properties Mr Smith?!.

Posted by Matt at June 25, 2007 09:55 AM

Here they come, the nutters. No, I don't have any buy-to-let properties and if I did I'd declare them. And no, the house price crash did not occur in 1989. The UK entered recession in mid-1990, at which time house prices were still rising. They started to fall after the onset of recession, and really fell sharply from mid-1991 onwards. Data here:

Posted by David Smith at June 25, 2007 10:07 AM

Dear David,
Readers might be interested to know how the Bank of England estimates house price movements
The BoE model (e.g. equation B.17) assumes that house prices grow in line with productivity (or real wages) in the long run, and are affected by interest rate changes and past house prices. In other words, recessions or expansions feedback on house prices, not the other way.
Many thanks

Posted by Costas Milas at June 25, 2007 11:22 AM

Costas, that's interesting - this is the famous BEQM (or Beckham). You probably know this off by heart, and I think I know the answer, but how does it deal with M4 money?

Posted by David Smith at June 25, 2007 11:31 AM

Dear David,
The BoE model refers to narrow money in the context of a money demand framework. However, to be fair to them, they also use other econometric models not available on the website.
Many thanks.

Posted by Costas Milas at June 25, 2007 11:53 AM

May i refer you to:

house price values started to drop in the last quarter 1989. The recession hit hardest 1991-1992, in particular the construction industry.

My late father was a carpenter, and work didn't dry up until then (anecdotal i know, but people actually do still remember the events of the last crash - don't try to pull the wool over our eyes - nutter!)

Posted by matt at June 25, 2007 12:13 PM

Interesting debate, but the bottom line in my view is this:

Gordon Brown's record as a chancellor is atrocious. He has overseen 10 years in which the followings has happened:

- A massive inflation of credit, money supply and house prices, creating the illusion of wealth
- A consumer spending boom based on this illusion of wealth, financed by credit and for products mostly manufactured outside of the UK
- The corresponding decline of the UK manufacturing industry
- The fiddling of inflation figures by weighting the "basket" that measures inflation towards cheap products imported from India, most prominently consumer electronics. This is a laughable measure of inflation, because it measures the price of discretionary spending, as opposed to necessities. How many TV sets, DVD players and mobile phones did you buy last month, Mr. Smith?
- "Real" inflation of the price of necnecessities (rent/mortgage payments, utilities, council tax, food, public transport) is running at 15% or more per annum.
- Wage inflation has not kept pace with the real inflation of the price of necessities, due to deflationary wage pressures from Asia and Eastern Europe.

As a result, despite all the illusionary wealth created by house price and other asset inflation, the people of Britain are worse off in terms of real spending power. If everything is so well, Mr. Smith, why is then that young families are struggling to make ends meet? Why are students in debt by tens of thousands of pounds? Why are personal insolvencies rising at record rates? Why are standards of living falling? Why does a family now require two earners, when previously a single earner's salary could support a whole family?

You, Mr. Smith have been a cheerleader to this false economy all along. Anyone with their eyes open can see it is based on the creation of illusionary wealth, whilst real incomes and standards of living are falling.

This era is now coming to an end, and the British public are will waking up to the fact that they have been “duped”. However, I suspect Gordon Brown will not carry the blame. His successor is inheriting a poisoned chalice.

Posted by Reinhard Schu at June 25, 2007 12:15 PM


Here is the BOE take, House price falls (Real not nominal) and recessions normally start at the same time, last time house price falls were ahead of the recession by one quarter.

However, what tends to cause both "recessions and house price falls", are large rises in interest rates. THE BOE have 3% rise within a year.

The reason is that as interest rates rise people change their budgets, this causes people to spend less, and so there is less demand for housing and goods.

If the interest rate rises are large, then the country goes into recession, as demand for goods and services reduce.

Demand for housing falls .Housing is more expensive due to the increased costs of funding and as people don't have jobs, (note the workforce shrunk by 2M at the same time as the large house price falls)

However, I would point out the BOE table is on Real house prices, Nominal house prices tend to be sticky downwards (People look at the nominal price of their house not real), and the only reason people cut the nominal price is because they are forced to, ie they can't service their mortgage.

Posted by kingofnowhere at June 25, 2007 12:57 PM

I see it from both sides.
There is a feeling that the economic miracle is all smoke and mirrors.
With unemployment at the same number as in 1979, and with costs on middle classes rising and rising- take a look at University costs in the past 10 years! It doesn't all seem so rosy.
However looking through the list of top 100 private companies in the UK (Sunday Times _ 24/06/07). The economy as a whole seems to be doing quite well.
The politics and by that I mean the next election will be influenced by the feel good factor. And at the moment , I would say Gordon could have a difficult time ahead.
Would anyone dare predict the interest rate for Sept 2009?

Posted by Peter Hatton at June 25, 2007 01:05 PM

Dear David,
House prices can fall prior, during, or after recessions. To get a meaning out of this, a proper statistical relationship needs to be established. The BoE model shows that both the business cycle and interest rates have reasonable explanatory power. Readers can collect data (readily available) to test whether it works also the other way.
Many thanks.

Posted by Costas Milas at June 25, 2007 01:29 PM

Why did this turn to house prices, as you seem disappointed? Because a) its the most important financial issue for the bulk b) it has produced the GB boom c) it will produce the GB bust. End to boom and bust? - pull the other one.

GB is a political giant - that is why he knows he must have an election in early 2008 - just before the fabled Spring Bounce is shown as a myth. He'll win just like Bernie in Ireland - just before - finally - the stats have come out showing prices are falling. Of course they've been falling for ages but it takes ages for it to show through.

He'll of course lose the 2012/13 election - as every govt does in an HPC.

Why do you persist in saying there's only been one crash? What about the early-mid 70s when prices fell 35% in real terms? Or are you seriously saying that nominal prices are all that matters? (Or 79-81 mini crash?) Or the Japanese crash from 89, or the US, Spanish or Irish ones now etc?

Next, perhaps you'll say that if stocks go up 5% pa but inflation is 10% then you're making money? They call it the illusion of wealth expansion - which is exactly what has been going on in the West for several years. (While stocks and property have risen so has debt - pte, comm and govt - far more)

GBs £100BNs in PFI for example.

Gold is the sole true indicator of wealth. Everything that will fall behind it's growth will show that wealth is/will be decreasing.

David, FWIW, I congratulate you for wanting to enter into this debate.

Posted by Jonathan Davis at June 25, 2007 02:02 PM

Before I am branded a "nutter" by Mr. Smith when he returns to this board, allow me to state that I am the manager of a successful German property fund.

Just last week, my fund picked up a property out of reposession at less than 10% of what it was once worth in the height of the 1990s reunification property boom. Today, I picked up a property at about 25% of its value 15 years ago. This is a foretaste of what may happen in the UK, especially outside of London and a stark warning to those that think property can only go up ion the long term. Whilst I do not think things will be quite as bad in the UK, outside of London we may see falls of up to 70% in real terms over the next 10 years.

Posted by Reinhard Schu at June 25, 2007 04:30 PM

Hi Jonathan

All that matters to most home purchasers is REAL house prices.

This is because it is a geared investment (approx 80% LTV for MR average Joe house purchaser)

Therefore if house prices rise just 2% (a real fall of 2% with 4% RPI inflation), then the return on there equity is 10% (2%/20%) or a 6% real return (10% less 4% RPI). And of course it is tax free!

So NOMINAL house prices are all that matter, and there is no illusion of wealth expansion!

They really are becoming Wealthier in REAL and nominal terms

Hope that help explain why nominal house prices are all that matter to Mr Average.

BTW if you want you knock of the mortgage, you will have to put in the imputed rent.

Posted by kingofnowhere at June 25, 2007 04:36 PM


Obvious mistake

All that matters to most home purchasers is REAL house prices.

should read

All that matters to most home purchasers is NOMINAL house prices.

Posted by kingofnowhere at June 25, 2007 04:44 PM


Of course I undertand that however a) you take yourself back to 1976 when reals had fallen - wages had risen and nominals stayed level - owner occupiers perceived a problem when young upstarts moved into their areas which the latter could not have afforded 2-3 years previously. The former knew they had overpaid. Inflation got them out a corner
b) nominals will fall big time this time - as they fell small time last time

Inflation will not help OOs this time (as it helped those in the 80s and less so in the 90s) as it's effectively capped at 5% (due to 2% CPI target)

Posted by Jonathan Davis at June 25, 2007 05:23 PM

You go away for a few hours, and look what happens. Real and nominal magnitudes are important but in the context of house prices, the distinction between real and nominal is particularly important. Nominal house prices fell significantly on two occasions in the 20th century - in the 1930s and early 1990s. Real prices fell on two other occasions; the mid 1970s and the late 1970s/early 1980s. All were periods of severe economic dislocation characterised by a loss of control of monetary policy and soaring unemployment.

As I say, the big falls in house prices in the early 1990s came only after the economy was in recession, when people had no option to cut. I think I introduced the concept of nominal house prices being sticky downwards to the debate

Reinhard, if you're a fund manager you presumably look closely at the companies in which you invest. So I'd suggest you look a little more closely at the statistics you are criticising. Cheap electronic goods have a tiny weight in the CPI and RPI. I'd also caution against a read-across from Germany to the UK.

Jonathan - you're a gold bug and you've come out and said it - well done. But surely gold, if it is anything, is a hedge against inflation? And you say inflation in capped at 2%.

Posted by David Smith at June 25, 2007 07:59 PM

Hi Jonathan

I am glad that you understand that nominal house prices are all that matters to home owners. You wouldn't beleive the number of people that say "real" house prices are all that is important.

As for the 70's. Perhaps you could show me where, house prices nominallly didn't rise

Q1 1974 9,928 18.2
Q2 1974 10,027 13.5
Q3 1974 10,148 10.5
Q4 1974 10,208 4.5
Q1 1975 10,388 4.6
Q2 1975 10,728 7.0
Q3 1975 10,978 8.2
Q4 1975 11,288 10.6
Q1 1976 11,519 10.9
Q2 1976 11,739 9.4
Q3 1976 11,999 9.3
Q4 1976 12,209 8.2
Q1 1977 12,409 7.7
Q2 1977 12,689 8.1
Q3 1977 12,970 8.1
Q4 1977 13,150 7.7

As for nominal falls this time, personally I think stagnation is better, as
1) I don't think house prices are more than 15% overvalued (Max)
2) I think nominal house prices only fall in when the total workforce shrinks (Correlation to changes in total employment and HPI .68)

So my view for the next 12 months is nominal house prices flat, Falls in Midlands (Look at supply and demand to see why), and rises in London SE (again Supply and demand)


FWIW, Gold is only a hedge against inflation if you are a USD investor, if you are a sterling investor the exchange rate kills you.

Posted by kingofnowhere at June 25, 2007 08:49 PM


Back to the original subject of your article. I am glad to see that you are now more critical of Brown. He had the extraordinary fortune to inherit a strong economy, where the supply side had been reformed and during an era of strong global growth. Even the 'independence' of the BoE was a less significant step, I'd argue, than Lamont's inflation tageting and Clarke's openness about the decision making process.

You say: "The real criticism of Brown is that, having freed his hands to concentrate on the big supply-side issues – intended to improve the economy for the long term – the record has been so mixed." You then go on to describe his failings in this area. You haven't listed any successes. I'd argue that you're right not to - because there haven't been any. However, if this is the case, how can you describe his record in this area as "mixed". Surely it is plain bad?

Posted by HJHJ at June 26, 2007 10:45 AM

It is always difficult to distinguish between what government delivered (usually much less than it thinks) and what would have happened anyway. But there are some positives on the supply-side. So, for example, the productivity gap in relation to major competitor countries closed even though employment was strong. Britain was the only G7 country to have closed the productivity gap with the US.

Posted by David Smith at June 26, 2007 12:11 PM

"Gold is only a hedge against inflation if you are a USD investor, if you are a sterling investor the exchange rate kills you."

"you're a gold bug and you've come out and said it - well done. But surely gold, if it is anything, is a hedge against inflation? And you say inflation in capped at 2%."

I see the $ falling perhaps 50% (on Trade Weighted) over the next years. So, £ could rise to perhaps $3 (who knows maybe even $4 but I doubt it). If this happens and gold rises to even just $3,000 the growth in £ will be significant. The last time gold rose it went up 10-fold, then doubled!

David, you make it sound as if I've hidden my gold thoughts. Look at the last newsletter. Gold will continue rising (trend) due to US inflation. UK CPI will be 2% but not inflation - 5% more likely as we have now. I suspect GB will alter the MPC remit within 18 months.

Posted by Jonathan Davis at June 26, 2007 12:48 PM

David Smith's article of December 2006:

"The Economy Is Under Control, Brown's In Control"

David Smith's article of June 2007:

"The Verdict On Brown: Could Have Done Better"

Consistent, moi?

Posted by Ranjit Bamergee at June 26, 2007 01:03 PM

Surely the point about Brown is that he has presided over low-inflationary growth. If you accept that growth is per se a good thing (and there are environmental and philosophical reasons for thinking it may not be), it only remains to ask, "How was it achieved?" The answer is that high government spending kept the economy growing, that high immigration kept wage-inflation down, and that the resulting low-interest rates facilitated consumer spending. The downside of all this? A mountain of debt and soaring property prices. It's all very well to bemoan the surge of HPCers on this thread, but Brown's way of running the economy has had potential social consequences whose eventual impact may be marginal or may be - pace the "nutters" - profound. As - was it? - Chou en Lai said of the French Revolution, "It's too early to tell".

Posted by bears all at June 26, 2007 01:32 PM

Dear David,
As much as I enjoy the speculative and crash discussion, why not run a real-time forecasting experiment: Those that are willing to prove themselves correct, they can collect whatever data they feel can be useful (with cut-off point 2007q2) and then produce DETAILED quarterly forecasts of the pound and house prices say up to 2009q4. Then, in 2009q4, we can assess their forecasting performance based on proper statistical tests.
Many thanks.

Posted by Costas Milas at June 26, 2007 03:29 PM

Good idea. I don't, in response to Bears All, regard all house price crashers as "nutters", only those who think I base my arguments on a non-existent buy-to-let portfolio or to sell property advertising in The Sunday Times. I don't dispute there are social consequences of the kind you refer to, as have been discussed many times on this blog. It's also the case, of course, that the crashers have got it terribly wrong over the past five years. That doesn't mean they'll be wrong in the future but the central argument still holds - house prices fall when the economy gets into trouble, not out of thin air.

Which brings me on to Ranjit. I don't think you understand these things terribly well. Both pieces lauded Brown's record on macroeconomic stability. The first piece said that the Tories should target him on the things he hadn't done or had only woken up late to. The second elaborated on some of these things. Pretty consistent in my book.

Posted by David Smith at June 26, 2007 03:46 PM

People who were wrong about a hpc, were only wrong because the goalposts keep being moved to support the bubble!.

Ridiculous mortgage multiples, that infamous rate cut back in 2005, the absolute blind greed by the BTL crowd, ploughing in obscene amounts of money into negative yeild assests, hoping for capital gains....

The subject of house prices is mentioned Mr Smith, as it seems to be the most important thing keeping Mr Browns "miracle" alive. Thing is you see, some of use live & work in the real world. You know, that one outside of the M25 boundry, on a normal wage & struggling to afford even the most basic of accommodation.

It's not people like you Mr Smith who will bring the economy down, it's will be those normal people, masssively indebited under the Labour regime of the last 10 years.

Posted by Matt at June 27, 2007 08:23 AM

I think you're a bit new to this, so I'd encourage a bit of reading elsewhere on the site, where these arguments have been covered many times. But you'll notice even on this thread that the housing market was recovering before the August 2005 rate cut. And while buy to let has made a difference, the vast bulk of house purchases continue to be by owner-occupiers. Multiples, by the way, are not sky-high on average - roughly 3 for those trading up and under 3.5 for first-time buyers, but that doesn't mean there isn't an affordability problem. This, by the way, is as bad, if not worse, within the M25. Always worth looking up a few facts.

Posted by David Smith at June 27, 2007 08:47 AM

I expect those are joint multiples.

I live in Oxford, average wage here is under £25k pa without a doubt. (median for the UK is about £23K, according to goverment statistics)

The cheapest one bedroom flat i can find is £130K asking price.

So even at the inflated salary quoted, that is more 5x salary here.

Posted by Matt at June 27, 2007 09:10 AM

David, re your "house prices fall when the economy gets into trouble, not out of thin air", would you be willing to accept the following amendment? "House prices fall when the economy gets into trouble, or when rising inflation forces interest rates up to a point at which many homeowners can no longer cope?".

Posted by Bears All at June 27, 2007 10:44 AM

Seems to me that the BOE equation B.17 based on houseprices reflecting real productivity over the long run, doesn't take into account supply and demand, where real per capita productivity will fall, but population pressure causes prices to rise.

Interesting article on Money inflation - money based on consumer goods, so as long as asia pegs its currency expect London real estate to rise.

Posted by jlaw at June 27, 2007 10:53 AM


I was interested to read your reply "...there are some positives on the supply-side. So, for example, the productivity gap in relation to major competitor countries closed even though employment was strong. Britain was the only G7 country to have closed the productivity gap with the US."

I remember about three years ago (roughly, I think) the figures showing that productivity growth had declined and the gap with the US was widening. Also, there has been a massive expansion in the public sector and figures have shown very low (or even negative) productivity growth there. High productivity growth areas, such as manufacturing (which, I believe has shown an approx. 7% annual productivity gain), have had static output figures, so have contributed less to productivity gain than if they had been expanding.

Looking from another perspective, our economic growth rate may have been an annual percentage point (give or take)higher than other G7 economies (except the US) but we have also had a more favourable working-age demographic profile and a big wave of working-age immigration. If we are also seeing large productivity gains relative to these other economies, then I would have expected our economic growth to have outpaced them by much more.

In view of this, where have the recent figures showing strong productivity growth come from? Am I right to be sceptical? Could the large increase in the money supply and the fact that public sector inflation is not reflected in the inflation figures (as public services are paid for through taxes, not at the point of use) be flattering the productivity figures (i.e. because the GDP deflator is thus estimated at too low a figure).

I could be totally wrong to be sceptical about this but, if so, I'd like to understand why please

Posted by HJHJ at June 27, 2007 11:26 AM

Median full-time male earnings, the normal measure, are about £25,300, though in the past we used mean male earnings, which are somewhat higher than that - above £30,000. I'd be surprised if the figures in Oxford were not higher than those national averages but I don't dispute that housing in Oxford is expensive. The multiples I quoted are based on single incomes not joint.

The way I'd put the housing market/economy question is as follows: the factors that hit the economy will also tend to hit the housing market. So let's take high interest rates. They squeeze homeowners' budgets - and make business cut back on investment and hiring. Demand in the economy falls, unemployment rises and, as part of the process, house prices may fall.

HJ - I'm not saying the productivity record has been good; but it is a fact that the gap relative to other countries has been closed. The Treasury claims trend growth in output per hour worked of about 2.4% since 1997. Immigration, or rather workforce growth, has contributed 0.6% a year to UK growth since 2001.

Posted by David Smith at June 27, 2007 02:30 PM


You back up what you say about productivity with the statement "The Treasury claims...".

Let's face it, any claim by the Treasury has been highly politicised and partisan since Gordon Brown became chancellor and should be treated with circumspection. Are there any independent figures? Didn't the government repeatedly change the way the figures were measured when it came to the public sector productivity as they didn't like what the figures showed?

Even if you believe the Treasury figures, you say you still don't think the productivity figures have been good. So what are these supply side successes of Brown to which you refer?

Incidentally (and I acknowledge that you give output/hr figures and workforce figures over different, though interlapping, timescales) adding 2.4% and 0.6% together gives 3%. But growth since 2001 has averaged more like 2.5%. So either there has been lower productivity growth than claimed or there has been a corresponding rise in unemployment over this period (which is not reflected in goverment figures). Which is it?

Posted by HJHJ at June 27, 2007 03:08 PM

No need to get tetchy. I've quoted the Treasury's figures because they're an attempt to separate out the trend from the cycle. The contribution of workforce growth has been a little higher recently, but has averaged 0.6% since 1997. Average hours worked have declined, reducing GDP by about 0.4% a year, other things being equal. Add in some other minor factors and you end up with the economy's average growth rate over 10 years of 2.8%, close to its trend rate of 2.75%.

As I say, the modest supply-side achievement has been to narrow the gap with competitor countries - alongside a high level of mainly private sector employment growth - and, I'd add, to achieve a lower Nairu (non-accelerating inflation rate of unemployment) than would have been thought possible in 1997. But, as I said in the piece, it could have been a lot better.

Posted by David Smith at June 27, 2007 04:17 PM


Let me assure you that I wasn't being in the slightest bit tetchy - I'm just trying to examine your argument in detail to see whether it can be justified. I question the productivity growth figures because there were plenty of articles only 2 or 3 years ago pointing out that the rate of productivity growth had slowed under this government and that we were falling behind other countries in this respect. Now we're told they're relatively good. I simply don't understand.

I'd also like to know what you consider to be the other supply side successes of GB to counter all the bad points (I don't have to tell you what they are), leading to the 'mixed' record to which you refer, as opposed to simply a bad record.

You know the old adage about economics working at the margins, and that small effects can accumulate over many years into large influences on economic performance so this is why it seems to me to be important to examine and question the detail to see whether he has moved us in the right or wrong direction.

Posted by HJHJ at June 27, 2007 04:41 PM

In terms of specifics, the R & D tax credit and the 10% CGT rate, while controversial now in the context of private equity, were positive steps. There are others, but I don't have time to do a list. However, this is a reasonably straight assessment from the DTI of what's improved and what hasn't:

Posted by David Smith at June 27, 2007 05:17 PM

Thanks David,

I'll give the DTI report a good read.

I have to disagree with you about the R&D tax credit being a supply side improvement. I have worked for companies that do R&D in the UK. Many management hours were spent on applying for tax credits on R&D which was being done anyway, and many more trying to reclassify other activities as R&D. I know of smaller companies who haven't applied, or have given up trying to apply, because the benefit wasn't worth the bureaucracy involved in claiming them. If there is a favourable business and general tax environment and you can get a decent return on R&D you'll do it anyway without such distortions.

N.B. If you type "R&D Tax Credits" into Google, you'll find that the names of lots of expensive accountancy firms come up. I don't think that creating more work for expensive accountants does much for productivity!

Posted by HJHJ at June 27, 2007 06:47 PM

The link posted by jlaw suggested that the net effect of globalisation is to reduce the wealth of the majority (i.e. workers) in developed countries, increase the wealth of the (workers in) developing countries and vastly increase the wealth of the lucky few in both areas. [Explaining why wage inflation has been held back despite growth in money supply].

The Economics textbooks commonly state that globalisation benefits all. But they don't explain the detail by which this occurs.

Do they really mean "benefits all on average" ? Whereby billions of previously poverty stricken people become a small amount richer (and healthier - which is a very good thing). A few hundred million developed world citizens (workers) become a lot poorer. Net effect is an overall benefit.

What are the mechanisms (apart from improving our consciences!) by which globalisation benefits the working majority in the developed world ?


Posted by Nick Thorne at June 28, 2007 10:40 AM

Most economists I have read from Samuel Brittan to Charles Dumas, say more or less the same thing about the beniefits of globalisation. Brittan thinks that it will be 50 years before wages equalise and start to rise, and Dumas, Greenspan simply notes that the global workforce has trebled overnight with huge gains to anything other than labour.

However, the global population is forecast to rise massively in just a generation or two, by which time the west which now forms 1/5th of the worlds population will be under 1/10th and dying according to the book 'The death of the west', so labour equalisation will probabily never occur, and under free movement of labour a race to the bottom maybe the outcome.

Posted by J Law at June 29, 2007 10:04 PM

Gordon Brown's long reign as Chancellor marked by continuous growth is not without merit.

One of the central themes though has been the rise in inequality - only the rich seem to have become much richer.

Critics will always argus his record as being somewhat illusionary (built on debt not earnings, immigration and increased government spending). Slow economic growth held at bay through a series of measures, has certainly left an unbalanced and more exposed economy.

Unchecked asset price inflation may yet bring about a crash. On the other hand, social inequality may continue to worsen, wiht social mobility hitting new lows. Either way, his record should yet come undone.

Perhaps a brighter future may have awaited has a recession occurred a few years back.

For my money the best and most effective Chancellor remains Geoffrey Howe - Gordon Brown the luckiest. Let us all hope he proves to be a lucky Prime Minister.

Posted by John Wood at July 2, 2007 02:04 PM


as usual, you have not dealt with my points and my reasoned arguments why the Brown miracle economy is false and just based on illusionary wealth created by house price and other asset inflation. All you can retort with is that consumer electronics make up only a small porption of the the CPI. That may be so, but it does not change the fact that CPI completely misrepresents "real" inflation, i.e. inflation of essential spending and necessities. As there are no proper statistics to capture these, it is difficult to tell, but estimates vary between 10-15%. This would be consistent with the money growth of 13% per annum we have seen Gordon Brown presiding over.

Take this anectdote as an example:
"Interest rates are just part of the story. Food prices are up, so are the costs of running a car. Even the cost of school trips and lunches for my four boys are skyrocketing."

How can it be? CPI is running below 3%, after all. As I said in my original post, the British public are slowly, and clumsily, catching on to the fact that they have been duped, that CPI figures do not reflect real inflation of real people, and that all that "wealth" created by asset price inflation is evaporating before their eyes.

Once again, I ask, if the economy is diong so well , why are disposable real incomes falling now for the second quarter in a row? Why does it take two incomes today to support a family, when one breadwinner sufficed ten years ago? The answer is simple: all that " wealth" is an illusion. It is created by asset price inflation.

Posted by Reinhard Schu at July 5, 2007 04:55 PM

Strange, I don't remember you making any points apart from that one, and a prediction that house prices outside London will fall by 70% in real terms over the next 10 years, which I didn't take seriously. Otherwise, everything you assert is either plain wrong or wildly exaggerated.

Your suggestion that true inflation is 10%-15% is, of course, ridiculous - it is hard to find any price components rising by that amount except mortgage interest payments, which purists say shouldn't be in an inflation measure at all. If you don't like the CPI, and I have my criticisms of it, just look at the RPI; tried and trusted for a century It has inflation at just over 4%, inflated by rising interest rates.

Wealth is partly housing wealth, as it always has been, but that only accounts for half of household wealth. It is not true to say that incomes have only risen because of double earners. Individual real income growth has been healthy; median real earnings are up by nearly a fifth in 10 years. Yes, there has been a temporary squeeze on real income growth but that, in macroeconomic terms, is quite a healthy sign. Unlike in the past, wages haven't responded to a temporary rise in inflation. I don't know where you get your information from but, as I said before, it is worth going to the statistical sources.

Posted by David Smith at July 5, 2007 08:44 PM


You commented above that median real earnings are up by nearly a fifth in ten years. This equates to approx 1.8% p.a. (compound) - which is pretty modest in my book.
Any thoughts on why this is noticeably less than the growth in the economy as a whole? Is it due to a larger workforce and how does this modest figure square with the productivity improvements relative to most other countries that you say have happened? As you might have guessed by now, I'm a little sceptical about the supposed productivity improvements.

Posted by HJHJ at July 6, 2007 12:17 PM

Mean earnings are up by rather more, but I'll have to dig out the figures. There's also been a small fall in the labour share of GDP, though not as much as in America.

Posted by David Smith at July 6, 2007 10:46 PM