Knowing and Making

Whenever I see some huge figure for an institution's "losses" I am suspicious. Ireland has now supposedly spent about 55% of its GDP , or €100 billion, to bail out its banks and buy toxic property assets from them. But they haven't created  anything with this money - it hasn't been spent on goods or services. In fact, it's just a transfer. So where is the money now, and has anything of economic value actually been lost? Partly the story is similar to that in the UK - lots of people who had a property and sold it in 2007 have made a ton of money. Many of the people who bought the properties have now handed the properties - and the debt - over to the government. But at average Irish house prices, that €100 billion is about 500,000 houses - and surely that number of people did not exit the housing market (in a population of 4.4 million). Even if they had, the government has certainly not foreclosed on (or acquired) 100% of the relevant mortgages. Beneficiar...

Latest in my series of bad puns on the word "hyperbolic". HIPs are being scrapped by the new government. This will provide relief to millions of annoyed estate agents ad house sellers everywhere. But why? HIPs should be a gift from the economics profession which is joyfully accepted by buyers, sellers and agents. The reason? Because houses are a classic " market for lemons ". A simple explanation of what this means and what the consequences are: The seller of a house knows much more about it than the buyer. Therefore, if the seller thinks it is worth £200,000, a buyer should apply a discount to take account of the risk that something is wrong. Let's say they apply a 10% discount and offer £180,000. After the discount, some sellers who do not  have anything wrong with their house will prefer to stay rather than sell for less than it's worth. Other sellers, who do have a skeleton in the cupboard, will keep their house on the market. The average quality...

Pricing, fundamentally, is a way of transferring a fair share of value from buyer to seller in return for the service the buyer receives. However, it is sometimes challenging to measure the value that each party obtains in a transaction. Also, economic theory contains a concept called asymmetric information which means that either the buyer or seller has information that the other does not. This is often as simple as “how much do I really want this” but it may be that one party actually knows something concrete that the other doesn’t, and can take advantage. For these reasons, in the early stages of development of a market, simplified pricing models arise. These act as proxies for the real value of the transaction – making it easier for people to negotiate. In the property sector, the typical proxies are fees based on a percentage of sale or rental price. In professional services, the typical proxy is a fee per hour which may vary according to the experience of the individual being emp...