Saturday, December 01, 2007

YouGov on the Economy

Long-time readers of this blog know that it's my firm belief that general elections swing on the voters' perceptions of who will run the economy well. Everything else is just noise.

In 1992, in the midst of a recession and with house prices lower than in 1990, voters went for the Tories because of doubts planted in their minds about Labour's competence, and fears of tax-rises. In 1997, voters had experienced tax rises from the Tories (after their promises not to raise them), and most importantly house prices in 1997 were still below 1990 levels, seven long years on, and voters had lost confidence in any possible recovery under the Tories.

So perceptions of how the economy is doing matters, and we come to YouGov's poll for the Telegraph.

They found that 14% were very worried about a recession and 50% were "somewhat worried". On the question of "which party do you think will run the economy well" the Conservatives were on 33%, Labour on 32% and Don't knows on 36% (compared with conservatives on 27%, Labour on 49% and don't knows on 23% at the 2005 general election).

None of the above is surprising. People "predict" the future by what they read in the press and the newspapers have been full-on with "Recession is nigh" stories, seizing on such things as house prices dropping in October according to the Nationwide, and ignoring the figures from the Land Registry which showed a rise, let alone the figures from everyone showing house price growth strongly up over the year. However, despite the gloom, it's not clear that the American sub-prime crisis will cause a recession in the USA, let alone here. A strong indicator is the oil price - during world slowdowns, the oil price always retreats. The huge American economy is still the main driver for the world economy. Yes, China and India are now factors - but both countries have small economies relative to the USA, and both are dependent on the USA. And globalisation has produced a set of automatic stabalisers that we don't fully yet understand. Anyone who claims they know with certainty what will happen in the global economy next year is likely to be fibbing.

Of course that won't stop the newspapers with their doom-and-gloom stories. An article in Moneyweek makes the point that these doom-and-gloom predictions are nothing new. They note that "in 1997 many commentators predicted that a Labour party win would hit [house] prices hard". Then came predictions of collapse after 9/11, and then in 2003 Professor Oswald advised everyone to sell their homes and the IMF has been predicting a housing collapse every year since 2002.

What is likely to happen? In order to have a house price crash, you need forced selling. That means people selling their house because they have lost their job, and are desperate enough to sell at any price. High unemployment is a necessary condition for a house price crash. In the absense of high unemployment, what you have is a stalemate between buyers and sellers. Buyers try to force prices down by holding off buying in the hopes that the seller will cut the price in desperation. Sellers meanwhile are determined not to cut the price, and withdraw from the market and stay put. In this situation the number of transactions drop, but the overall prices stay relatively steady.

What about the buy-to-let people? They would off-load en masse only if they were struggling to rent their properties out. But there is no evidence at present of rental falls or an increase in vacancies. Indeed the Association of Residential Letting Agents say that tenant demand is at it's highest for five years.

What is happening now is not unlike what happened in Britain in 2005, in my opinion. In the absence of a recession, there will be a pause, and then buyers will get tired of waiting, and the market will move again. These pauses are actually healthy. They allow people to build up deposits, they allow people to pay off some debt, and most important, while the housing market stays level, earnings continue to rise, which eases things in a couple of years time.

There is a shrillness in the press at present that is determined to talk Britain into a recession and talk the Labour government out, but I believe the economy is too complex to be talked down like this. What is likely to happen is that growth will go from the current above-trend 3% to trend 2.2% and Labour will probably go into a general election in 2009 with a record of 12 solid years of growth and the opposition with a record of 12 solid years of wrong predictions.

Update 3/12/07. I see that Vince Cable is saying that the "housing bubble is about to burst": "Gordon Brown’s reputation is built on economic growth but there are ominous signs that the bubble is now about to burst." In my opinion this is a mis-reading of the situation. I think events will prove him wrong, and when they do, we should expose him mercilessly as yet another b$$$$cks-merchant masquerading as a serious politician, when all he's doing is engaging in scare-mongering.


Hughes Views said...

The house price crash in the late eighties / early nineties was at least in part the fault of Nigel Lawson - possibly the most incompetent chancellor in my lifetime (except for Anthony Barber of course). In his 1988 budget Mr Lawson announced the end to multiple mortgage tax relief for people jointly purchasing properties but he gave several months notice. The effect was a mad dash to complete sales over the next few months at almost any price. This mega-boom was swiftly turned into a bumper bust.

It's ironic that the subsequent economic jitters were exploited by the Tories to win in 1992. But everything's for the best - 1992 was the election to lose; if Labour had won it would’ve picked up the ERM shambles thus 'proving' that it couldn't be trusted with the economy and Michael Portillo might now be in his twelfth year of premiership...

Praguetory said...

"In order to have a house price crash, you need forced selling. That means people selling their house because they have lost their job, and are desperate enough to sell at any price. High unemployment is a necessary condition for a house price crash."

Firstly I'd be interested in what you would define as a crash? From 1989 to 1995 house prices fell by just 13% in absolute terms in what was a fairly prolonged slump. A crash? Not sure.

Your arguments re unemployment comes across as a weak argument. Even at a time of low official unemployment (strangely coupled with high rates of worklessness) personal bankruptices are running at a record 100,000 a year. Aren't these people forced selling? Asset prices movements tend to be sharp and exaggerate general trends. The main determinant of asset prices is expectations, but fundamentals always come into play eventually.

You admit that buy to let investors who treat the housing market as an investment market are much more likely to react quickly should there be a sign of a downturn.

In the near future the impact of a) tighter lending by banks choking off exuberant demand
b) borrowers moving from low fixed to higher variable rates
c) higher inter-bank lending rates
d) economic uncertainty
could all ignite lower expectations. Once people expect prices to fall, the vicious circle will start and whether you measure the current situation on the basis of affordability or income ratios the market has a lot further to fall than in 1989.

snowflake5 said...

PragueTory: "Firstly I'd be interested in what you would define as a crash? From 1989 to 1995 house prices fell by just 13% in absolute terms in what was a fairly prolonged slump. A crash? Not sure."

It definitely counts as a crash. House prices should increase on average at least at the rate of inflation. Assuming inflation of a "mere" 2% p.a., house prices in 1995 should have been 12.6% higher than in 1988 - but they were 13% down. Inflation during this period actually averaged 5% per annum, so prices should have been up 34% in 1995. They weren't holding their value in real terms and were way below trend. That represents a massive loss to people.

As for your comment about "official low unemployment coupled with strangely high rates of worklessness" - sorry but labour participation rates are WAY up compared to Tory years. Apart from the high unemployment in Tory years, there was also a large amount of hidden unemployment in the form of non-participation under the Tories. The rise in disability claimants started under Thatcher circa 1983 - it's one of her legacies, and Labour has at least managed to stop the trend growth in disability claimants, as well persuade many women back into the workforce.

You claim the number of bankruptcies is having an effect on house prices, but most bankrupts have no assets, they tend to be singles with low income in rented accomodation who have run up debt. If they did have assets, they wouldn't be declaring bankruptcy as merely selling their homes would clear their debt, particularly as house price growth was pretty mega in the first half of the year. They are declaring bankrupt because they have no assets that can be sold to offset debt.

In order to have a house price crash, we need to have a recession of the order of 1992. Without a recession, you merely get a pause of the sort we saw in Britain in 2005 and in the Netherlands in 2003. Refer also to the Australian experience of 2004.

Praguetory said...

Thanks for responding. I don't agree that a period where house prices don't keep up with inflation is a crash.

By that yardstick, the FTSE has crashed over the last decade and the 8% fall in house prices in Sydney over the last three years is a crash. Seems like you want to have things both ways.

snowflake5 said...

PragueTory: "I don't agree that a period where house prices don't keep up with inflation is a crash"

In the period 1990-1997, not only did house prices not keep up with inflation, they didn't keep up in nominal terms either. They went down. What's more the "13% drop in nominal" you quote is an average that takes into account places like Kensington and Chelsea that didn't experience a drop at all due to oligarchs and oil people, while other places experienced a drop of about 30%. The people who experienced a drop of 30% experienced this as a crash, and went to the polls and voted accordingly.

I did an article about this a while back about London, where I posted the drop in prices for each London constituency. Search the blog using "house prices" in the Nav bar at the top to read it. It's an eye-opener as to what certain constituencies were experiencing.