0:11
So what we'd like to do today, is there, what we'd like to do now is to consider
then, what are the factors to help us explain
how this market becomes as irrational as apparently, it became.
In fact, we know it was irrational
because the market collapsed catastrophically in 2007.
And we go back and we look at this and we think, what were people thinking?
And some of us go back and think, what was I thinking?
Because, not all of us can exempt ourselves from the madness
that, that, that took hold.
So, what do we want to focus on, in terms of explaining how the market got this way.
Okay, so we can start by saying I think it's a very basic observation.
Clearly we're looking at a question of market psychology, right?
There's a psychology here that's afflicting the market
and we need to interrogate what that psychology is.
So what is the psychology of this market? Where does it come from?
How does it take shape? What are the factors that are behind
it and so on. So what is the psychology of the market.
Where are people what's sort of defining how people are thinking about this market.
1:46
They talk about it in the U.K. for
example, as being the bottom rung of the ladder.
Get on the ladder now.
If you wait it's going to be even more expensive, harder to get on
the ladder and so on.
And that sense of urgency then yes, is underscored by the
idea that there's a sort of everybody else is doing it,
I need to get in on this well, as well, so,
yes, certainly people are seeing a trend out in the marketplace.
I need to jump in on that trend.
But, the nature of the good, it's curious,
I mean, in some ways wouldn't we predict, given
how expensive it is, that people would do, would
undertake even more due diligence than they might otherwise.
2:16
I mean,
if you were going to say, buy a certain amount of, of
a share or a stock or something like that, you would
con, you know, you'd think, okay, well, I think the company's
going to do well and then expect price appreciation in the share.
You, maybe you'll put in, what, $10,000,
$15,000, $20,000 as an average retail investor.
Now you're putting in hundreds of
thousands of dollars, you're indenturing yourself
to a bank through a mortgage for like 15, 20, 25 years.
Don't you think that you would.
But I think they think they did. >> They think they did.
Okay, so that's certainly true. That one of the things about
the market pyschology.
Is it gives people the impression that they've done
the necessary due diligence to make that purchase seem informed.
>> [INAUDIBLE] increase in the housing prices.
>> Well so the houses go down, and then they stay flat then
starting in 1996 you certainly start to see them coming back up again.
But, in other words, when people are sitting there saying I, one
of the things I know about this market is, I've seen past results.
As we all know past results are a guarantee of of future results.
Where are they getting that idea of, of, of past results?
Like, where is that experience coming from?
>> [INAUDIBLE]
>> So some of them is from their own experience.
I have a house that's increased in value, I'm
going to buy another house that will increase in value more.
That's certainly true.
Where else are they getting that kind of sense
of let's call it a sense of protection, even.
I know that the price will go up because I can simply map onto
the past into the future.
>> Prices are actually increasing But they're increasing with income.
So, so the
>> Are the, are the prices increasing with income?
>> They will increase overall, long
term with income, because they're proportional.
>> Yeah, that's true.
Well, okay we could back up for a moment.
>> The real price is not increasing, but the nominal price is.
>> The nominal price is increasing.
The thing is, we should, right, I mean.
It' pretty clear, very basic mechanics of what drives the housing market.
What are the two.
Fundamental macro factors, that drive housing prices in the long term.
Interest rates and income, right.
How much money am I making, ie to put towards the house.
And how much does it cost to borrow the money that I don't have.
So, between those two cat, I mean there's obviously, other factors at
play and, but in the very large sense, if you want to
look at overall trends in housing, they follow basically the price of,
the price to carry debt, and the amount of money that you make.
So income, national income, and national
interest rates. That's certainly true.
How many of our home buyers though do you think were saying hm I'm
going to buy a house, first I want
to go investigate current trends in national income?
And do some, I'm going to pull some graph paper out.
I'll maybe, you know, do some regressions and see what, and see what comes up.
I mean, do you think people were informing themselves in that way?
>> I think they trust the banks to do that.
>> Okay, so somebody else is going to do that.
That's hard.
That's math.
I mean, that's like, you know, maybe some linear algebra, whoa, whoa, whoa, whoa.
>> It's economics.
>> It's [INAUDIBLE]. >> It's economics, it's tough.
>> But I'm asking where they're prior, this prior experience comes from.
In other words, Simon tells us that one of the things
that, sort of, is a source of comfort for people is they
can look at this market and get a sense that they know
where it's going because they've seen where it's coming from, come from.
So some of then, themselves have personal experience, but
where else are they getting that sense, that sense from?
>> They're just hearing what people are saying.
>> Yeah, experience of other people, right?
5:52
And so, you know, we accumulate, people accumulate
these kinds of success stories anecdotally, in part because,
it, I think it's part of our nature, that
goes back to this idea of the market psychology.
One of the features of the psychology of the market is, it's being reinforced
by these kinds of, of success stories.
And so people are hearing about this and that in forms, I
think a little about this idea of they know where the market's going.
You had your hand up.
>> I think people tend to listen only what they want,
although there is positive and negative information available about the market.
>> Yeah.
So one of the things clearly that's going on here,
is that people are selecting the information that they want.
We're going to get into that a little bit.
I suspect that one thing people did not do was to go their local library.
Pull out their most recent edition of
the Brookings Institute journal, and read Case and
Shillers argument, and then go to the next
dinner party and say, well actually listen, I
was looking at some econometrics the other day and if you want to draw some graphs
for people and then prove to them you
know, statistically houseing prices are out of whack.
That's probably not what they're going to do.
What they are going to do is say, yeah, my dentist told me he
just sold his house for 40% more than he paid for it two years ago.
Right?
Yes?
>> I think, [INAUDIBLE] ,we didn't say it specifically, but also the [INAUDIBLE]
from the fact that the banker is willing to put down the money [INAUDIBLE].
>> The banker is willing to give them the money, a very critical factor.
We're going to come back to that in just a moment.
Yes?
>> Literally the government is, is
incentivising through tax incentives to buy
the house so when [INAUDIBLE] to buy the house it looks good.
>> In the U.S. yeah, in the United States
it's true because a mortgage is actually deductable off
of pretax income which is another it gets another
factor which that put under the idea of opportunity costs.
Every year that I'm paying rent is a year
that I'm paying more taxes than I should Because
what I really ought to be doing is sort
of capturing that wealth, via sort of this tax preferred
or tax advantage scheme, and, and so that's sort
of, you know, why would I want to just sort
of throw my money away when I could be
actually accumulating in tis, this acid and watching it grow.
And
I should also note that governments are also perhaps
promoting policies, you know, prosperity, society and so on.
So there's this kind of larger national
rhetoric about the value of home ownership.
At the same time, I think it's also worth
noting that this is not a U.S. story, is it?
It's not, I mean the housing bubble was not an American phenomenon.
Those of us in the room who are from the
UK, or from Ireland, or Dubai, or Vilnius, or Barcelona, or
any of the other during this period that underwent housing bubbles.
We're seeing in fact really a global story, we just happen
to be accessing that story through its iteration in the US.
But it's not as if this is an American phenomenon by any means, is it?