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Biriani

Everyone Agrees There Will Be No Hpc

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Article in the FT today: apparantly all economists now agree that there is no property bubble, and house prices will continue rising for ever. (NB "all" in this case refers to those from Halifax, Nationwide and estage agents)

http://news.ft.com/cms/s/de8d6aa8-c052-11d...00779e2340.html

On the one hand, it's worrying that serious economists are judging that there will be no fall in house prices.

On the other hand, when the last bear turns bullish, and everyone talks about a new paradigm, the end cannot be far away. Take this gem:

"Economists have begun to ditch comparisons of house prices to incomes or rents for other models of sustainable house prices. The new fashion has been to adapt the equity pricing dividend discount model to housing."

Hmm, rejecting traditional valuation methods to justify historically high prices.... now where have I heard that one before?

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That's : "No-Crash-Yet means No-Crash-Ever" thinking.

A true crash (ie sharp sudden slide) is MORE LIKELY than ever because of:

+ The excessive valuation of property,

+ The willingness of banks to lend very aggressively, at unprecedented Loan-to-Value ratios,

+ The vulnerability of psychology that is driving the market: people have stopped thinking,

and are buying on pure emotion, and the "feeling" thanks to crowd reinforcement, that prices

cannot fall

Sit back and enjoy. You may not have too many more months to wait

Months?

To wait for what? to buy at the 'best' time?

Surely you mean 'years' (for a healthy dip in real prices adjusted for inflation)

Capital Economics, the consultancy, has changed its forecast of a 20 per cent drop in nominal house prices over two years to a prediction of little change.

I guess Biriani missed this bit.

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There is no doubt that we are in a new paradigm compared to the 80's and 90's ........ but there again I'm sure there will be a even newer, new paradigm just around the corner.

It might be different that in the past, but its almost certain the future will be different to today - this stuff ain't rocket science is it !

Personally, I belive in 'paradigm shifting' as the new black.

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Nothing said about higher unemployment.

The simple fact is that there needs to be a trigger, either higher IRs or higher unemployment.

Higher unemployment looks certain at the moment, increasing IRs less so but still a possibility.

For these high prices to be sustainable, unemployment and IRs would have to stay at their current levels for 5-10 years because today's mortgages will still be huge in 5-10 years time and wage inflation won't have helped erode the debt much, if at all.

Prices could just possibly grow at or near inflation until we get a trigger. Therefore we are likely (IMO 100%) to see a crash but when is anybody's guess.

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And what on god's earth is an equity pricing dividend discount model?

Dur!

The idea is that the price of a property should be related to the present value of the future housing services derived from its ownership.

As with any similar calculation, the rate of interest used to discount the value of future housing services is extremely important in determining the present value. Since this rate has plummeted as the real yield on long-dated index-linked gilts has plummeted, this method makes it easy to argue the sustainable value of a home has shot up.

Any BTL-er knows that!!! :blink:

even the Scouse bint from C5's How To Be A property Developer :lol:

Edited by jp1

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I guess Biriani missed this bit.

No, I saw that, and the fact that economists I would otherwise respect are changing their minds does make me think and carefully consider my own beliefs.

However, I don't really see any new arguments to support prices that weren't around a year or two ago, and I do see additional potential problems on the horizon. Like DrBubb I suspect that this is a case of those who haven't yet seen their predictions come true losing their nerve.

I just hope that I can hold my own nerve and not end up cracking and buying a £200k 1-bed flat....

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Dur!

Any BTL-er knows that!!! :blink:

even the Scouse bint from C5's How To Be A property Developer :lol:

Oh, so obvious now you explain it. It's basically the same scam as "affordability" but put in a different way...

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The FT article, surprisingly, reads like a roundup of the more recent arguments posted on HPC: ;)

+ key questions are: size of overvalue / what is sustainable level, and how quick to correct?

+ HPI seems to be fizzing again; approval levels.

+ no bubble, at least not up to 2003

+ ditch the old models based on price / earnings and price / rent ratios + appeal to retrace of history; they don't work.

+ HP equilibrium (slightly?) lifted above historic norms on the back of post-1992 low interest rates; affordability pricing model, or the Weeken (2004) asset pricing / discounted future services model.

+ current situation only moderately overvalued, but sensitive to future path of interest rates.

Edited by spline

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"so were all agreed there will be no crash and that our own overblownn assets are as safe as cash ?"

yes.

"have we asked anyone else or the people that are supposed to buy these properties ?"

no.

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And what on god's earth is an equity pricing dividend discount model?

From an earlier thread:

You can think of a house as something that delivers a service stream extending into the future (you get to live in it, assuming it doesn't fall down), so let’s value that as a typical rental income that could be generated by letting it. Discounting this stream back to the present gives a current value, or price, but obviously the discounting rate has to reflect the actual risk of owning the house - this is usually split into a risk-free bit and a risk premium addition, but overall is only a couple of percent different from spot rates. A lower rate implies a higher value.

Weeken, O. “Asset pricing and the housing market”, BoE report, 2004 [PDF file]:

http://www.bankofengland.co.uk/publication...in/qb040102.pdf

Edited by spline

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There is no doubt that we are in a new paradigm compared to the 80's and 90's ........ but there again I'm sure there will be a even newer, new paradigm just around the corner.

It might be different that in the past, but its almost certain the future will be different to today - this stuff ain't rocket science is it !

Personally, I belive in 'paradigm shifting' as the new black.

Lol - sounds like another 'it different this time!' as far as i'm concerned.

But if rates were the same as in the last time I guarentee it would be different - at currently borrowing level a 15% Interest Rate would be far, far worse.

In fact I think it would only take rates to rise to 7/8% to be the same equivilent effect as the last HPC.

In some ways it is different - the kinfe edge is thinner and we're far more susceptable to smaller IR changes.

I wont corrolate Interest Rates to inflation - the government have avoided doing this for some years now and the two as so far removed from each other that the whole concept of IR being used to combat inflation is busted and becoming more so ever time Gordon says inflation is only 2%....

- Pye (Property Speculation Ninja :ph34r: )

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From an earlier thread:

You can think of a house as something that delivers a service stream extending into the future (you get to live in it, assuming it doesn't fall down), so let’s value that as a typical rental income that could be generated by letting it. Discounting this stream back to the present gives a current value, or price, but obviously the discounting rate has to reflect the actual risk of owning the house - this is usually split into a risk-free bit and a risk premium addition, but overall is only a couple of percent different from spot rates. A lower rate implies a higher value.

Weeken, O. “Asset pricing and the housing market”, BoE report, 2004 [PDF file]:

http://www.bankofengland.co.uk/publication...in/qb040102.pdf

Thanks - but if we have to base the value of a house on supposed rental values I think I prefer Young Goat's mantra of buy at 12 times annual rent, sell at 20. At least there is a bit less hot air in that version.

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And what on god's earth is an equity pricing dividend discount model?

Is there an economist in the house?

I suspect it's this, basically discounting the rent flow

Today

		P=D/(R+RP-G)		P=Price of house		D=Net Rental		3.45%R=Risk Free Rate		2.40%RP=Risk Premium		2.00%G=Real Growth in rents	1.00%

I did these numbers last autumn IIRC and to me it seemed that house prices were then fair value. (if not a smidgen below)

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Nothing said about higher unemployment.

The simple fact is that there needs to be a trigger, either higher IRs or higher unemployment.

Higher unemployment looks certain at the moment, increasing IRs less so but still a possibility.

For these high prices to be sustainable, unemployment and IRs would have to stay at their current levels for 5-10 years because today's mortgages will still be huge in 5-10 years time and wage inflation won't have helped erode the debt much, if at all.

Prices could just possibly grow at or near inflation until we get a trigger. Therefore we are likely (IMO 100%) to see a crash but when is anybody's guess.

If the trigger for the housing boom was low IR's, does that necessarily mean that you will need a trigger for the house prices to crash?

If we dont get a trigger, I still think that a slight increase in IR's will have a dampening effect on the housing market.

IMHO houses have risen as much as they can with the current level of IR's, with unemployment increasing and higher IR's on the cards, we're on the way down from here.

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Thanks - but if we have to base the value of a house on supposed rental values I think I prefer Young Goat's mantra of buy at 12 times annual rent, sell at 20. At least there is a bit less hot air in that version.

Ah yes, but it’s all about fact that rents in the future are, in effect, “index linked” and increase over time along with everything else (whereas mortgage costs generally don’t, at least not on the whole amount) – discounting back gives the current value = house price estimate. KoN's given the formula above.

Edited by spline

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Ah yes, but it’s all about fact that rents in the future are, in effect, “index linked” and increase over time along with everything else (whereas mortgage costs generally don’t, at least not on the whole amount) – discounting back gives the current value.

Hi Spline

I see you replied earlier to the asset model, I missed it and posted the formula

Also mortgages you can of course fix for 25 years. Go to your landlord and say "I want to fix my rent for the next 25 years and see what he says" ;)

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If the trigger for the housing boom was low IR's, does that necessarily mean that you will need a trigger for the house prices to crash?

If we dont get a trigger, I still think that a slight increase in IR's will have a dampening effect on the housing market.

IMHO houses have risen as much as they can with the current level of IR's, with unemployment increasing and higher IR's on the cards, we're on the way down from here.

I think that everyone is largely overlooking the impact that rising unemployment will have and especially on this site - focus is almost completely on IRs. We don't know if IRs will go up, we don't know when they might go up, we don't know if they might go down, we don't know what they might go up or down to, we don't know what they would have to go upto to act as a significant trigger to bring about a significant HPC

However we do know that unemployment is going up, against the economic backdrop it looks like it will continue to go up - so will this not be the trigger for the HPC? How can unemployment do anything other than increase dramatically from a historical low? When retail sector starts shedding jobs and now public sector is being constrained by costs and can't employ more (look at NHS problems) then where are the extra jobs going to come from. Certainly not from manufacturing.

I believe that this rise in unemployment will gradually continue and at some point will reach a threshold whereby it has a severe impact on the housing market and acts at the trigger for a significant HPC.

Is this not already happening?

Why so much focus on IRs?

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Weeken, O. “Asset pricing and the housing market”, BoE report, 2004 [PDF file]:

http://www.bankofengland.co.uk/publication...in/qb040102.pdf

Hmmm.

Mervyn King obviously didn't think much of that bit or research, seeing as he made his 'house prices are a matter of opinion, debt is real' speech not long after its publication, the started to hike IRs in direct response to HPI

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And what on god's earth is an equity pricing dividend discount model?

Is there an economist in the house?

The theory is that the value of a house is the present value of all future housing services, discounted as appropriate.

It is easier to think in terms of rental properties. If we assume that the house can never change use, will never be empty and will never cost anything to repair then it is worth the sum of all future rents received. Assuming a 50 year lifespan (short), then a house which generates £10,000 p/a will be worth 50 x £10,000 = £500,000.

Quite clearly £10,000 in 50 years time is worth less than £10,000 today, accordingly we discount the future receipts accordingly. If you assume a discount rate of 5% this brings the same house down to approx. £200,000. 10% equates to £100,000.

As can be seen, the rate applied has a profound effect on the value of the asset. What they seem to be arguing is that it is appropriate to adopt a much lower discount rate resulting in a much higher valuation.

My problem is I think that this is not appropriate. I mentioned a 5% discount rate above, if you look at rental properties this is the going rate today.

If you do a simple profit and loss estimate based on today's prices you can clearly see that 5% is inadequate. If you factor in mortgage interest payments, repairs, agents fees and voids then nothing less than 8% will do.

They seem to be arguing that low yields on government bonds are justification for adopting a lower discount rate. I just don't see how this is suppossed to work.

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I think that everyone is largely overlooking the impact that rising unemployment will have and especially on this site - focus is almost completely on IRs.

I think you may have a point - lately everyone seems to have got feverish about IRs, thus the constant claims that the £ is crashing. But a lot of people and BTLs would be able to ride out some degree of IR rises. Whereas unemployment is a real killer for keeping up one mortgage, and certainly would create problems for those multiple properties (even if there is some yield, it makes voids and repairs far more problematic).

Maybe in the end it's a combination of several factors rather than the mythical "trigger".

The theory is that the value of a house is the present value of all future housing services, discounted as appropriate...

Smoke and mirrors come to mind. You can "prove" pretty much anything by tinkering with figures in a spreadsheet, it's just that the real world tends to not be as mallable...

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I suspect it's this, basically discounting the rent flow

Today

		P=D/(R+RP-G)		P=Price of house		D=Net Rental		3.45%R=Risk Free Rate		2.40%RP=Risk Premium		2.00%G=Real Growth in rents	1.00%

I did these numbers last autumn IIRC and to me it seemed that house prices were then fair value. (if not a smidgen below)

Just for clarification - does this mean you're assuming that rents will rise every year at inflation + 1%? On that basis housing may well look fairly valued but it's a pretty hefty assumption to make.

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I wonder if these are same economists who were almost unanimous in their support for the common currency.

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  • 333 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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