Magazine article The Spectator

A Boom Market in Economic Nonsense

Magazine article The Spectator

A Boom Market in Economic Nonsense

Article excerpt

The government recently proposed that schoolchildren be given lessons in personal finance. Can I ask that, alongside the Lower Fourth, room be made in the classes for the AA spokesman who recently said this: 'People wanting to get high-aspiration vehicles at an affordable price will have been hit by the crash in [the cars'] value.' Yes, this remark really is as stupid as it seems, but first a little context. He was talking about a form of hire purchase called 'Personal Contract Purchase', whereby a motorist pays a deposit, followed by two years of monthly payments. At the end of this period, the buyer has two options: he can either pay a lump sum to purchase the car outright, or he can return it to the finance company which organised the deal.

The size of the final lump sum demanded by the finance company is fixed when the buyer takes out the deal, based on what the vehicle is expected to be worth in two years' time. For example, a motorist who bought a Volvo XC90 in December 2006 was told that in January 2009 he would have an option to buy the car for £18,775.

As it turns out, the predicted value was wide of the mark: thanks to the recession, the value of a two-year-old Volvo XC90 has crashed to £12,600. Therefore, the motorist would be pretty foolish to pay £18,775 and keep the car. He would be far better off handing the car back to the finance company, then buying an identical two-year-old car on the second-hand market for £6,000 less. In other words, in no sense has the motorist been hit. Far from it: he is thousands of pounds better off. What the AA man really means is that the finance companies involved have suffered.

It is all too typical of the nonsense which is spoken and written about the economic crisis. There may be very few 'green shoots' of recovery, despite business minister Baroness Vadera's claim to have spotted some last week, but there is certainly a booming market in nonsense and warped logic. The housing market is a hotbed of it, many of the worst examples originating from press releases by estate agents desperate to drum up business, reproduced in the media without critical analysis. I have lost count of the number of times I have read a headline to the effect: 'Bad news for the housing market as prices fall'. One might as well say: 'Bad news for drinkers as beer price falls'. What the headline really means is bad news for the estate agent who wrote the press release on which the headline is based.

Take this gem, from last week: under the headline 'Rightmove sees ray of hope for house prices' appeared a story in one national newspaper announcing that the property website had seen 'buyer inquiries' rise from 199,762 in the first two weeks of 2008 to 429,560 in the first two weeks of 2009. This statistic is supposed 'to offer hope to millions of borrowers concerned about negative equity'. Except that it does no such thing. A 'buyer inquiry' on the Rightmove website simply means that someone has logged on and searched for some property.

What Rightmove doesn't know is why those people looked for property: was it because they wanted to buy a place or was it because they are going to have to sell their home and want to know what sort of prices properties like theirs are fetching?

Another headline which has begun to annoy me is '75,000 people to lose their homes as recession bites' attached to predictions that 75,000 properties will be repossessed in 2009. …

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