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Flash

Lob Off The Growth Premium

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I have been lurking for a while and am making my first post.

This is the time (in my view) that the housing market is at its most interesting. A long upward trend has come to an end and a new one is about to start. The question is: In what direction? Down, flat or even up again? It seems that even the most optimistic VI projections are expecting flat prices or slightly down in the medium term, especially if adjusted for inflation.

In my view, prices are at this very high level, with rental yields abysmally low because the price has what I call the “Growth Premium” factored in. This is the extra price a homebuyer or investor is prepared to pay because “prices are going up stoopid!!”

But now the boom is over. And it’s sure been a wild ride with houses in many areas tripling in value and more over the last decade. Just ten years ago, if I’d slipped into conversation with a drinking buddy that I had a mortgage of around £100k, he’d probably cough up his pint. Nowadays, he’d probably call me a “lucky sod” for having such a small debt burden. It amazes me how things have changed, in such a short period of time - society has become anesthetized to borrowing.

When thinking about house prices, it is worth considering how we value growth shares. When valuing a growth stock investors are prepared place a higher value on the company’s earning when they are growing substantially. Hence growth stocks have higher Price/Earning Ratios. However, if the company goes ex-growth (and even if the earnings remain strong), the PER must fall to reflect the change in circumstances. So the share price falls as the “Growth Premium” is deducted.

I believe we will see the same happen with house prices as home buyers/investors come to realize that they can bide their time. They do not have to chase a market that will leave them behind if they wait.

So the next question is: “How big is the GP?” Any thoughts?

Flash

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I have been lurking for a while and am making my first post.

This is the time (in my view) that the housing market is at its most interesting. A long upward trend has come to an end and a new one is about to start. The question is: In what direction? Down, flat or even up again? It seems that even the most optimistic VI projections are expecting flat prices or slightly down in the medium term, especially if adjusted for inflation.

In my view, prices are at this very high level, with rental yields abysmally low because the price has what I call the “Growth Premium” factored in. This is the extra price a homebuyer or investor is prepared to pay because “prices are going up stoopid!!”

But now the boom is over. And it’s sure been a wild ride with houses in many areas tripling in value and more over the last decade. Just ten years ago, if I’d slipped into conversation with a drinking buddy that I had a mortgage of around £100k, he’d probably cough up his pint. Nowadays, he’d probably call me a “lucky sod” for having such a small debt burden. It amazes me how things have changed, in such a short period of time - society has become anesthetized to borrowing.

When thinking about house prices, it is worth considering how we value growth shares. When valuing a growth stock investors are prepared place a higher value on the company’s earning when they are growing substantially. Hence growth stocks have higher Price/Earning Ratios. However, if the company goes ex-growth (and even if the earnings remain strong), the PER must fall to reflect the change in circumstances. So the share price falls as the “Growth Premium” is deducted.

I believe we will see the same happen with house prices as home buyers/investors come to realize that they can bide their time. They do not have to chase a market that will leave them behind if they wait.

So the next question is: “How big is the GP?” Any thoughts?

Flash

very good point. I wouldn't pretend to know enough to put a figure on it, but it seems likely that this factor alone could play a large part in swinging the momentum the other way. Investors always factor in future price expectations, and this is why being a contrarian works well... if you can time it right!

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it means an instant drop of 15% in my books. this is why the cheeky offer has to be more cheeky.

id offer 25% less at this point in time. speculating the loss downward as it went upwards.

though, it better to wait 1-3 yrs and let it play itself out.

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Maybe the growth premium (or overshoot) started when prices rose above long-term averages? Inversely this could be applied as a shrinkage-premium to the historical troughs in the prices.

House prices rise and fall but they mean nothing. The only number that's real is the size of your mortgage.

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It would be great if the trigger that so many feel is necessary turned out to be greed over higher returns offered by alternative investments.

I suspect the primary motivation behind many BTL investors was greed, once they see the potential return on their property portfolios stop rising and realise the hassle associated with dealing with tennants, selling in a falling market, and exposure to risk that they now face they will soon start rushing for the exit.

Greed could well be the trigger if one were needed.

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With tax breaks like SIPPS I would say the GP is well supported.

I think the end of the HPI will see consumption fall away, and many 'luxeries' like non-supermarket brand food sales etc.. slump, as higher inflation cuts in with increasingly higher unemployment in 'actaully making things' jobs like manufacturing.

Consumption drives an economy, not production.

The dropping value of real purchasing power will result in a drop in consumption of complex products with many value-added stages, and the complex producers who produce them will lose thier market - like Italy has experianced.

The currency will contunoiusly depreciate like Italy's lira.

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Guest Charlie The Tramp

Good point. Perhaps I should have called it the Greed Premium!

Or the Debt Premium!

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I suspect the primary motivation behind many BTL investors was greed, once they see the potential return on their property portfolios stop rising and realise the hassle associated with dealing with tennants, selling in a falling market, and exposure to risk that they now face they will soon start rushing for the exit.

Greed could well be the trigger if one were needed.

agreed in a nutshell.

but its ok. just get in some EAs to value it to a price that suits you. say £300k or something. easy ?

oh, and put some ornamental scented candles in a defunt fireplace.

very soon. a young city professional will come along, buying at either the full asking price. or renting it long term in order to buy your house for you at a price that suits you.

Edited by right_freds_dead

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The currency will contunoiusly depreciate like Italy's lira.

If the currency devalues to much expect to get foreign investment in UK property.

Edited by padders

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  • 301 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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