Was the Senior Partner at Oxford Economics away on holiday?

The National Housing Federation (which represents 1,300 English Housing Associations) has today released annual Home Truths report, based on research by Oxford Economics.

Mortgage brokers Charcol dubbed last year’s Home Truths report as a “Dodgy Dossier” because of its questionable maths. Last year’s report asserted that the 7.5% growth in house prices in 2006 increased the average house price/ earnings ratio from 8 to nearly 11. But the fact that wages grew during that period makes the assertion arithmetically impossible.

And, while we are looking at last year’s report, it is always worthwhile comparing forecast with actual. In 2007 the Home Truths report forecast that “a housing market crash is unlikely” and that house prices would increase by 2.2% (a remarkably precise figure) in 2008.

But looking at the Oxford Economics website today we read that ‘the housing market is already in deep recession, with house prices down 8% or more since last autumn’.

Needless to say, the 2008 report makes no reference to the 2007 report, and indeed is nowhere to be found on the National Housing Federation’s site. I wonder why?

The 2008 report, itself unencumbered by the unbelievably poor forecasts of a year earlier, ploughs ahead to produce another prediction: “25% house price increases by 2013”.

Of course, the desired media response is obtained, on the required front pages:

• Daily Express (the world’s greatest newspaper) “House Prices to rise by 25%”, and
• Daily Mail: “House prices will rise by 25% over the next five years, say experts”.

Of course, “say experts” is the vital part of the headline.

Why does Oxford Economics make these assertions? And what assumptions is it making about the availability of housing finance, the relative attraction of investing in other assets, unemployment, immigration, wage inflation?

No clarification was forthcoming from either the National Housing Federation or Oxford Economics. Meanwhile, most of our national papers cover a 25% increase in house prices.

What can we conclude from this?

1. That forecasting the UK housing market is fraught with peril
2. That forecasts that help the housing industry (which includes estate agents, politicians, lenders, newspapers …) will be uncritically bandied around by our national press
3. That there is a deeply-held belief that house prices must always go up, that this is a good thing, and that everybody benefits from house price increases
4. That getting yourself heard is more important than what is actually heard, especially if it offers good news in a time of bad news
5. That most commentators do not have the time, energy or patience to challenge the reports that are being produced
6. That obtaining the supporting data, assumptions and algorithms behind these forecasts is a non-trivial exercise
7. That the Senior Partner at Oxford Economics was indeed away on holiday

And the next paradigm balloon to burst?

Evan Davis of the BBC apologised this week on behalf of all economists for failing to warn the world of the impending financial crash. Good for Evan, but economists have no monopoly of self deceit.

I dare say many of the bankers who walked away with millions in bonuses did so in the sincere belief that they were merely winners in a larger win-win game. The rating agencies were clearly wrong in some of their risk assessments and are accused now, at the very least, of having cut corners when rating the avalanche of collateralised debt obligations, but it’s not clear that they were knowingly dishonest.

The Chairman of Northern Rock’s Risk Committee was accused recently by a Commons Committee of ineptitude, but he is an honourable man and no crook. Similarly a Deputy Governor of the Bank of England was accused by another Commons Committee of being “asleep at the wheel”, but not of pocket-lining conspiracy.

Some of main actors in this sad drama probably are pretty shady characters. Some are clearly amoral if not immoral. Some would not have wished to question the validity of the golden goose when it was rewarding them so generously. But I suspect most of the players (and most of us investors) were simply stupidly credulous. We all bought into a crazy paradigm. And that paradigm balloon has burst.

It’s not the first; from the belief in alchemy, the South Sea Bubble, through actuarially justified pension holidays, and the dotcom crash we have an ignoble history. There are crooks involved but many more fools.

Which raises the obvious question, what ridiculous paradigms are we still accepting? I think there are a few contenders:

• that it's OK for governments to engage in massive off-balance sheet borrowing - which could well bite us in the bum in a few years time
• that the carbon trading market works well in providing effective incentives for reducing pollution - which has an economically dubious basis and looks ripe for abuse and the delivery of perverse outcomes
• that effective regulation of financial institutions is possible - when it seems to provide no better foresight of future hazards than looking in the rear view mirror while driving through fog at 70mph
• that free market capitalism has somehow proven its ultimate superiority to all alternative arrangements for running our economic affairs.

According to a newish school of academic thought (and George Soros in his latest book), the assumption of rationality in economic behaviour is probably the greatest false god. This certainly looks like a plausible hypothesis when I ruefully assess my future income in retirement.

A distasteful incident

I feel should draw to your attention, before any of our readers spots it, the coverage of the rather unsavoury happenings that have been taking place in Chislehurst recently.

Although I am seen in South London from time to time, it is not my habit to travel to the outer reaches of Bromley and indeed I have not been there for many years.

Of course at the time in question I was at home, safely tucked up in bed, as I am sure Samantha will testify.

Consumers flee in terror from killer bees

Excuse me, I thought retail banks weren't lending any more?

But my wife recently received a letter from Taina Uusitalo, Head of Core Credit Cards at Lloyds TSB, which enclosed four lovely credit card cheques.

The British Bankers' Association's Reporting Officer's Reference Guide tells us that a credit card cheque is “a cheque drawn against a credit card account that gives the cardholder another way of accessing funds up to their credit limit. This is usually to make transactions where credit cards are not accepted. Interest is normally charged from the transaction date. Important features include the following:

• credit card cheques may not provide the same level of protection as when you buy items with a normal credit card
• there is usually a transaction fee for each cheque you use
• the interest-free period of the credit card may not apply to the credit card cheque.”

Hang on a minute, aren't these the same credit card cheques the UK Government launched an investigation into in 2006? The Government was spurred into action because 326 million cheques were issued that year, of which 313 million were sent without being requested. It was calculated that, if consumers had actually used these 'cheques', it would have cost them £298 million more in interest and charges than if they had made standard credit card purchases.

With haunting music by Elena Kats-Chernin and original and touching contemporary 3D animations by animator/ director Marc Craste, LloydsTSB's award-winning TV advert tells us “no wonder so many people choose to bank with LloydsTSB. We’ve been voted Britain’s Most Trusted Bank for seven years running”

But who gives out these Most Trusted Brand Awards? Reader’s Digest. The 2008 study was conducted online in October 2007. Respondents were asked to name their ‘most trusted brand' across 37 categories and responses were unprompted. Respondents were Reader's Digest subscribers - so the respondents were dental receptionists and GP practice managers.

How are the other Most Trusted Brands shaping up? Virgin Media won the 2008 award for the most trusted ISP. And promptly had an ad campaign banned by the Advertising Standards Authority for misleading customers.

The Government in 2006 recommended that customer communications about credit card cheques should include a compulsory summary box aimed at explaining associated fees and charges.

May I propose additional wording to be provided in bold font at the head of promotional letters for credit card cheques?

"THIS PRODUCT IS UNLIKELY TO OFFER YOU BEST VALUE IF YOU HAVE ACCESS TO ALTERNATIVE SOURCES OF CREDIT OR OTHER MEANS OF MAKING PAYMENTS. IF YOU HAVE DIFFICULTY MANAGING YOUR EXPENDITURE, YOU SHOULD SEEK DEBT COUNSELLING ADVICE, FOR EXAMPLE FROM YOUR LOCAL CITIZENS ADVICE BUREAU, BEFORE USING THIS PRODUCT."

In the meantime, how can you safely dispose of your credit card cheques? I recommend wearing gloves while handling them carefully with a pair of fire tongs. They are insufficiently absorbent for other uses, but their glossy finish means they provide a useful lining for the cat-litter tray.