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The Bond Market Is The Housing Market

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The worlds capital is a lot more liquid today than it was 20 years ago, even 10 years ago.

Capital is chasing yield.

Sure Mr smith might find a deposit difficult to gather which may lead you to believe the price of houses isn’t only the interest charged on capital however Mr pension fund, Mr SWF, Mr excess capital….all of them they don’t need deposits or even mortgages. They do and will chase yield.

So as far as I can see the old bull argument of interest rates holds quite well (not BOE rate but general bond rates everything from a year to 10+ years out inc all bonds not just UK).

Houses pay like bonds and are linked strongly imo. If bonds yield 4% and a house yields 6% then capital will flow to the houses.

Therefore I would say we could just as well talk about a bond crash.

Will that happen?

I am beginning to think not simply because as time passes capital should get cheaper simply because of productivity and the accumulation of capital.

Bonds have been in a 20 year bull market and so have houses.

Bonds went into a bear market briefly and houses prices crashed.

Bonds then rallied and house prices rallied.

I guess what I am saying is I see bonds staying high and perhaps even getting more expensive (ie yield dropping). And if so I don’t see a HPC let alone a big one.

Someone prove me wrong…..please

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Only that not every house rental income is equal or "fungible" (due to location variables). But overall, the larger the portfolio, the more truth that holds - the bond market is the housing market.

The low yields of BTL, for a new start today, signals that houses are safe as er houses.

We need a black swan event. A black swan event has not been priced in. Ironically, the housing market has not priced in a bond market collapse....

Edited by Money Spinner

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The bond prices are only as high (therefore low yields) because of QE and central bank treasury swap purchases.

I honestly don't believe there is enough "real" demand for them to justify such low yields. The FED is buying not to fund the "stimulus" but to push long term rates down.

So this game will end, when inflation starts really kicking in, in food & energy prices specifically, causing the CBs to tighten...... I think. :blink:

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Only that not every house rental income is equal or "fungible" (due to location variables). But overall, the larger the portfolio, the more truth that holds - the bond market is the housing market.

The low yields of BTL, for a new start today, signals that houses are safe as er houses.

We need a black swan event. A black swan event has not been priced in. Ironically, the housing market has not priced in a bond market collapse....

To me it seems quite natural that interest rates should go down with time simply because we run out of things that are urgent or necessary.

For example in India they need lots of new……everything….. so capital is expensive as it is allocated to those things that are needed most and quickest say eg power stations.

As time goes on capital should get cheaper as those big infrastructure projects are undertaken and no longer compete for the new capital.

With time as more capital is accumulated and the accumulation of capital becomes easier be it in the form of roads/factories/gold whatever then the cost of capital should go down as it basically has done for at least the last 20-30 years.

So although the bond market may crash temporally it seems natural that interest on capital would get lower with time.

If that is a fair sound assumption then in a constrained supply market like the UK house prices are linked and will be linked very strongly with bond prices. If bond prices will naturally go up then so will house prices.

BTW I understand that capital could get more expensive, eg if say America and china and Europe went out to war and destroyed each others infrastructure then the cost of capital would naturally go back up so as to be allocated more efficiently. However that is an extremely unlikely event. I cant foresee anything likely to increase the cost of capital.

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The returns on money do have an impact on the housing market, but because of all the subsidies interest rates are well below their market rate.

I'm sure you're aware of the the following Cells but it's probably worth repeating:

Housing yields are fixed (more or less) whereas interest on money can change pretty quickly, the change in a perfect market would have an immediate impact on house prices. So a £10k rental yield in a 5% interest rate environment would value the house at £200k, if rates on money moved upto 10% the house now halves in value.

So I would say that general interest rates - not just bonds - are a key factor in determining house prices. The BofE know this which is why they prevented interest rates from rising at all costs, they cannot allow house prices to reduce.

I agree with the other stuff you say about the efficiency of capital deployment and it's price. Good post as always.

Edited by Chef

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Houses pay like bonds and are linked strongly imo.

Only insofar as they represent stores of value for excess money. All that off-balance-sheet inflation.

If bonds yield 4% and a house yields 6% then capital will flow to the houses.

Cost of holding a bond vs cost of maintaining a house, dealing with tenants and voids, etc? Different kettle of fish.

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Only insofar as they represent stores of value for excess money. All that off-balance-sheet inflation.

Cost of holding a bond vs cost of maintaining a house, dealing with tenants and voids, etc? Different kettle of fish.

Yes they will not be exactly the same but they are indeed linked to a large degree.

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people don't tend to leverage bonds. they're liquid and less volatile. end of.

(edit - yep, the bargaining stage still)

Edited by Si1

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Yes they will not be exactly the same but they are indeed linked to a large degree.

No.

HPI was driven by leverage and expectation of capital gains. In other words, Get Rich Quick. Noone buys bonds in the expectation of big capital gains[1], or to get rich quick.

[1] Except at the height of the credit crunch, when bonds were hit by forced sales to raise cash. Filled my ISA with bonds about 18 months ago and made some jolly good capital gains :)

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I would say the housing market is a precursor to financial capital formation. The resulting financial capital created finds its way into bonds.

If the reverse happens and bond money seeks out housing - then financial capital is destroyed.

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The impression I get is that thanks to fiat currency and fractional reserve banking, the concept of money is one of trust only, it is not tangible.

Since money has lost trust as a store of value, in effect, the housing market is money. It is the new store of value.

At least, that's how the Government would like it to be, the banks too. It's no good if people opt out of the system and choose gold as their store of value.

If the housing market plummets, the currency plummets. Not one because of the other, but because one is the other.

If that makes any sense :)

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The worlds capital is a lot more liquid today than it was 20 years ago, even 10 years ago.

Capital is chasing yield.

Sure Mr smith might find a deposit difficult to gather which may lead you to believe the price of houses isn’t only the interest charged on capital however Mr pension fund, Mr SWF, Mr excess capital….all of them they don’t need deposits or even mortgages. They do and will chase yield.

So as far as I can see the old bull argument of interest rates holds quite well (not BOE rate but general bond rates everything from a year to 10+ years out inc all bonds not just UK).

Houses pay like bonds and are linked strongly imo. If bonds yield 4% and a house yields 6% then capital will flow to the houses.

Therefore I would say we could just as well talk about a bond crash.

Will that happen?

I am beginning to think not simply because as time passes capital should get cheaper simply because of productivity and the accumulation of capital.

Bonds have been in a 20 year bull market and so have houses.

Bonds went into a bear market briefly and houses prices crashed.

Bonds then rallied and house prices rallied.

I guess what I am saying is I see bonds staying high and perhaps even getting more expensive (ie yield dropping). And if so I don’t see a HPC let alone a big one.

Someone prove me wrong…..please

I was heavily invested in bonds up until about 2 weeks ago. I have seen a sharp reversal in bond prices, at least in the US where I retain most of my funds, but wonder where the smart money is going as stocks are still not anywhere near out of the woods. PIMCO (the world's largest biond fund managers) are moving more into stocks recently and have warned about bond bubbles. The future is very uncertain and I suspect diversification is the best way forward. If credit tightens again and IR rise bonds will not be a good place to be. The Forex is doing a bumper trade of late which suggests a few trillion is in cash.

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The impression I get is that thanks to fiat currency and fractional reserve banking, the concept of money is one of trust only, it is not tangible.

Since money has lost trust as a store of value, in effect, the housing market is money. It is the new store of value.

At least, that's how the Government would like it to be, the banks too. It's no good if people opt out of the system and choose gold as their store of value.

If the housing market plummets, the currency plummets. Not one because of the other, but because one is the other.If that makes any sense :)

This is the essense of the UK economy. It is HPI and our future prospects are still tied to the direction of house prices. If the subsidies (artificially low IR) are pulled the market will crash heavily.

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I was heavily invested in bonds up until about 2 weeks ago. I have seen a sharp reversal in bond prices, at least in the US where I retain most of my funds, but wonder where the smart money is going as stocks are still not anywhere near out of the woods.

Just piling into glod[1] now?

[1] Pace PTerry.

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Houses pay like bonds and are linked strongly imo. If bonds yield 4% and a house yields 6% then capital will flow to the houses.

Not necessarily - houses are riskier and less liquid: you'd expect them to yield more.

Otherwise every £ of capital would head straight for the very riskiest assets, since they have the biggest return.

Bonds are also still a better match for some pension scheme liabilities.

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Just piling into glod[1] now?

[1] Pace PTerry.

Cash

Mostly US $ which I plan to switch into Sterling to buy a house--then I don't care much what happens as I need a place to live.

So far, Sterling is down by about 25% vs. the $ from where I sold Sterling (at arond 2.05 years ago) and I am hoping for a further drop to the 1.40s before making the trade. That should be a currency profit of 30% and a housing drop of about the same amount.

Edited by Realistbear

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Not necessarily - houses are riskier and less liquid: you'd expect them to yield more.

Otherwise every £ of capital would head straight for the very riskiest assets, since they have the biggest return.

Bonds are also still a better match for some pension scheme liabilities.

capital USED to flow to the housing market in the form of MBS and CDOs. Im sure Capital will be wary of doing the same thing again until the market bottoms.

these guys are looking for the return OF capital as much as return ON capital. No point in putting 100 in a venture, to earn 6 whilst getting back 70.

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I'd tritely quip "the great thing about bonds is that they're always rallying" (think it through) but you're smarter than that and we can do much better here.

Someone prove me wrong…..please

Every good ponzi needs something that can be bought and sold on tick.

The rule of thumb generally goes - ten down, ninety back.

I sell you a subscription to the circle of infinite happiness for a buck, you buy it on the expectation of introducing another nine upstanding folk at the same price.

With me so far?

This last and most glorious of bubbles is the pension bubble.

Nothing to do with houses, prices, or dodgy paper.

And it's been going on for far, far longer than you might imagine.

All that's keeping the loco running is the set-in-stone requirement that funds set on autopilot back in the 30's have to keep asset allocations the way they were pre-Bretton woods (just as it dictated those self-same funds pursue capital growth merely a decade a go, with the resulting boom in junkalicious stock - and just as it dictated the funds pursue high yield debt, with the obvious effect on the debt markets we've just seen).

Time and tide, and the wheel turns.

Age distribution vs allocation model currently dictates a tapering of risk assets (that's a mouthful, say it ten times downing a shot between words, and you'll be my hero).

So there's a ready made ponzi - a hump of suckers and rubes being pressed into buying Reserve horsehockey, much like lips and bums into a sausage machine.

Ten down, ninety back.

The only thing is (and really, I'm now quite aghast that nobody's even thinking about it, let alone saying "woah there soldier") is that Reserves are stripping the capital base of these self-same funds.

And at roughly five times the rate of the original contributions.

Ever see a gilt market (the good stuff, not that emerging markets junk) turn illiquid?

If you live through the next few decades, you just might.

And the more I ruminate on that thought, the more of my chair my backside swallows.

Edited by ParticleMan

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Age distribution vs allocation model currently dictates a tapering of risk assets (that's a mouthful, say it ten times downing a shot between words, and you'll be my hero).

So there's a ready made ponzi - a hump of suckers and rubes being pressed into buying Reserve horsehockey, much like lips and bums into a sausage machine.

Ten down, ninety back.

The only thing is (and really, I'm now quite aghast that nobody's even thinking about it, let alone saying "woah there soldier") is that Reserves are stripping the capital base of these self-same funds.

And at roughly five times the rate of the original contributions.

Ever see a gilt market (the good stuff, not that emerging markets junk) turn illiquid?

I'm not sure i understand this bit - any chance of a layman's summary?

Are you saying that boomers nearing retirement are now seeking less risky assets for their pension funds and so are buying bonds (or their funds are)? Dont follow the next bit.

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Only that not every house rental income is equal or "fungible" (due to location variables). But overall, the larger the portfolio, the more truth that holds - the bond market is the housing market.

The low yields of BTL, for a new start today, signals that houses are safe as er houses.

We need a black swan event. A black swan event has not been priced in. Ironically, the housing market has not priced in a bond market collapse....

I think that by definition Black Swan Events are unlikely to be priced in. Where I think a lot of HPC'ers might be going wrong is that they assume a black swan event means an event with a negative effect on prices. Cultural bias in the use of the word 'black' I guess. But of course a Black Swan Event could be a 'positive' event too: a major new discovery of oil; a major breakthrough in energy production; a solution to climate change that doesn't require us to ration carbon; significant new productivity gains through biotech dicvoveries; the UK leading the way in a major breakthrough in genetic engineering; etc etc.

Or of course the most likely "Black Swan Event" as regards House Prices: reckless printing of money.

Its no coincidence that Taleb is, I believe, spending his time working on a fund that intends to hedge against hyperinflation.

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  • 245 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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