Jump to content
House Price Crash Forum
Sign in to follow this  
LuckyOne

What Is The Relationship Between Price And Yield ?

Recommended Posts

An old fashioned view of property is to sell when yields drop to 5% and to buy when yields rise to 15%. The current trend in yields seems to support a recalibration to sell when yields drop to 4% and to buy when yields rise to 10%.

A question that I have formenting in the back of my mind is how the balance of power between prices and yields might be changing.

In the bubble days, yields were low because prices were rising and rents took a while to catch up to prices.

Now that prices are falling, we seem to have the same effect but for a different reason : yields are falling because sellers are withholding property from the sales market and are renting them instead. This causes a drop in yields as rental supply is increasing and prices are not rising much.

Is it possible that accidental landlords might collectively be sowing the seeds of their own destruction?

They think that waiting for prices to pick up is a good idea individually but the collective negative impact on yields resulting from the increase in supply in the rental market as a result of their decisions actually means that prices can't rise as professional buyers (who are the buyers of last resort) see no opportunity at such low yields.

Share this post


Link to post
Share on other sites

I guess exceptionally low returns on savings can prolong it for a while. After a while though, people will just desert investing in the UK, ie carry trade. I'll be looking for buying oppurtunities in Asia in the near future, i certainly wont in the UK unless its an abnormally realistically priced house.

Share this post


Link to post
Share on other sites
I guess exceptionally low returns on savings can prolong it for a while. After a while though, people will just desert investing in the UK, ie carry trade. I'll be looking for buying oppurtunities in Asia in the near future, i certainly wont in the UK unless its an abnormally realistically priced house.

There will probably be some confusion amongst monetary economists when the Sterling carry trade really takes off. If you can borrow at close to 0% in the UK and are very certain that the currency will devalue by 10% a year, you can very comfortably buy assets elsewhere funded in Sterling.

Of course, this increase in activity will be hailed as yet another "green shoot" by people who have no idea about what is actually going on. Increased credit demand will be beacuse of the anticipated total repayment cost compared to returns available elsewhere which is an indictment rather than a compliment.

Share this post


Link to post
Share on other sites
There will probably be some confusion amongst monetary economists when the Sterling carry trade really takes off. If you can borrow at close to 0% in the UK and are very certain that the currency will devalue by 10% a year, you can very comfortably buy assets elsewhere funded in Sterling.

Of course, this increase in activity will be hailed as yet another "green shoot" by people who have no idea about what is actually going on. Increased credit demand will be beacuse of the anticipated total repayment cost compared to returns available elsewhere which is an indictment rather than a compliment.

Sorry, i probably dont mean carry trade, ie. lending abroad? More investing abroad given the dire fundamentals here. You'll probably get a better yield elsewhere and profit from not being in sterling over the long term.

Share this post


Link to post
Share on other sites
How can I borrow money at close to 0%?

Or is it only banks and hedge funds?

Asset prices are set by banks and hedge funds in time of extreme stress.

There are a few lucky people (I am not one of them as I have no debt) who have seen their borrowing costs reset to close to zero at the moment but I agree with your implication : retail borrowers pay much more than zero at present.

Share this post


Link to post
Share on other sites
Sorry, i probably dont mean carry trade, ie. lending abroad? More investing abroad given the dire fundamentals here. You'll probably get a better yield elsewhere and profit from not being in sterling over the long term.

The carry trade is sometimes misunderstood.

Domestic investors who choose to send their money abroad do the same implicit calculation as offshore borrowers who choose to borrow here and invest the proceeds abroad.

In both cases, people expect a depreciation domestically and better returns overseas.

Share this post


Link to post
Share on other sites
How Long Can Disequilibrium Last ??

Not very long, of course.

All the old meaningless and untestable 'supply and demand' arguments trotted out by the bubble's apologists are exposed as a nonsense by anomalously low yields - if there was a genuine shortage of places to live then, of course, rents would be pushed high as well - but, in fact, they've far less quickly than wages this last decade or so. The astonishing leap in demand for buying pwoperdee of this decade had nothing to do with an increase in the need for places to live, but rather a combination of speculative fever & an increased ability to bid high sums caused by loose lending.

Maybe for about as long as interest rates stay anomalously low?

Share this post


Link to post
Share on other sites
An old fashioned view of property is to sell when yields drop to 5% and to buy when yields rise to 15%. The current trend in yields seems to support a recalibration to sell when yields drop to 4% and to buy when yields rise to 10%.

A question that I have formenting in the back of my mind is how the balance of power between prices and yields might be changing.

In the bubble days, yields were low because prices were rising and rents took a while to catch up to prices.

Now that prices are falling, we seem to have the same effect but for a different reason : yields are falling because sellers are withholding property from the sales market and are renting them instead. This causes a drop in yields as rental supply is increasing and prices are not rising much.

Is it possible that accidental landlords might collectively be sowing the seeds of their own destruction?

They think that waiting for prices to pick up is a good idea individually but the collective negative impact on yields resulting from the increase in supply in the rental market as a result of their decisions actually means that prices can't rise as professional buyers (who are the buyers of last resort) see no opportunity at such low yields.

I don't think there ANY rule of thumb yield laws the average man in the street can apply when looking to buy a home.

Specialist investors may have more luck within their niche (either geographic or by type) as they can be specific.. but on a national basis forget it.

To illustrate the point you might find investors in the northern part of the country thinking a yield of 12 % or even 17% might signal the moment to buy in, while in the south their fellow investor might decide 7% or 8% is the mark. And you'll find a different answer for commercial vs residential and by the by different betweeen family houses and flats etc.

Share this post


Link to post
Share on other sites
I don't think there ANY rule of thumb yield laws the average man in the street can apply when looking to buy a home.

Specialist investors may have more luck within their niche (either geographic or by type) as they can be specific.. but on a national basis forget it.

To illustrate the point you might find investors in the northern part of the country thinking a yield of 12 % or even 17% might signal the moment to buy in, while in the south their fellow investor might decide 7% or 8% is the mark. And you'll find a different answer for commercial vs residential and by the by different betweeen family houses and flats etc.

I agree that rental yields are a tool that most "average man in the street" buyers don't use when buying a house. I call this group the retail buyers.

The criteria that can be used to determine relative or absolute value are :

- Number of bedrooms

- Price per square foot

- Gross rental yield

- Quality adjusted, net rental yield

Most retail buyers seem to focus on the first criterion. The retail market is becoming a bit more spohisticated now and an increasing number of people are looking at price per square foot as well.

There is a buyer of last resort for propoerty. The buyer of last resort is the professional landlord. The professional landlord looks at rental yields (both gross and net) as they key determinant of any investment decision.

One of the reasons that sales volumes are so low at the moment is that retail sellers are holding homes off the market in an environment where rents are dropping. This is keeping homes too expensive on a yield basis for the professional buyers to buy which is crimping volumes. Professional buyers care about the economics and ignore the non-economic factors that so many retail buyers seem to think are important.

The dispassionate professionals are staying away from the market in droves. Retail should pay more attention to what the professionals are doing.

Share this post


Link to post
Share on other sites

I think that this is a really key question; if we assume that, historically, rental yields have been ~8%; this is a real yield (i.e. rents go up with inflation, so if you buy a flat at £100,000 yielding 8%, £8,000 a year, then you could expect that, in 10 years, rent might be, say, £12,000, which would mean that it would be yielding 12% on your original purchase price in nominal terms, but still only 8% on your original purchase price in real terms, i.e. £100,000 adjusted for inflation).

This is a pretty good yield. Risk free real interest rates (i.e. the yield that you get on TIPS/Index linked Gilts) is ~2.5%. Thus the risk premium on property is ~5.5%. This is pretty high and compares well with the dividend yield on shares. Total returns on shares have been higher since, overall, capital value of shares rises significantly higher than inflation.

There is a good argument, I believe, that the risk premium is too high, and has been kept that high by the restriction of credit. Although clearly we are currently in a tight credit environment, there is, I think, a good argument that in the very long term credit for property will be looser than it has been, overall, for the past 100 years, and that thus the risk premium will stablilise at a lower rate. I wouldn't be suprised if prices overshoot on the downside to ~ 8% and then stabilise at ~ 6%. I shall seriously be thinking about buying a house if rental yields go to 8% in London (they are more like 5% at the moment, and perhaps 4% outside london). Of course this means that prices still have a way to go.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   295 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.