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Smell the Fear

Speculators And Market Efficiency

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Accepted financial theory does not decry the role of the speculator. Rather, he is seen as an essential market participant, providing liquidity and performing the vital function of "price discovery".

I contend that the housing market was previously less efficient. The loans that were available to landlords were at commercial rates, rather than mortgage rates. The landlord required a much greater return on a property to meet his financing costs. It could possibly be argued that this reflected the legal situation, in that tenants had greater rights pre-AST (assured shorthold tenancy).

Since the changes to the law brought about AST, finance for BTL has come to reflect the decreased risk of this asset class. Hence rates have come down, and banks are much more willing to lend to landlords.

As a result, landlords have significantly increased the competition for property, and the price has been driven to the point where only future capital growth is available as a return to the landlord. Make no mistake, many properties are overvalued (i.e. new build flats returning 3%) and will undergo a correction in real terms.

However, most properties are returning 5-6%. This seems like a poor return, but is perhaps perfectly adequate given the low level of risk involved. Sure there can be problems, but most landlords have an easy time. I know that anyone I have rented from in the past 6 years has had virtually zero hassle, and their rent paid on time every month.

Although landlords make up a small part of the overall market, they have a large influence. Prices are set at the edge, where transactions occur. If only one person is bidding in an auction, the price is likely to be low. Add another, and the price can increase massively. Thus the addition of landlords to the familiar mix of buyers has a disproportionate influence on price levels.

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you have a point.

the speculators have quite happily shifted their attentions from dotcom shares to property,causing equal and opposite effects in both markets.

I cannot see a way for markets that function in this manner to reach equilibrium without overshooting.If history is a good guide then the bigger the disparity from fundamentals,then the bigger the correction and overshoot./undershoot....housing is in deep doo-doo!!!!

just look out for the NEXT bubble......my money is on commodities....has been for 3 years nearly.

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Houses have a real cost of construction associated with them, just like cars, boats, computers or any other manufactured item. The prices can be pushed up speculatively but it won't stick for long.

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You've made a good point about how speculative buying has helped push up prices.

Equally, speculators getting out of the market and taking their capital gains while they can could result in a much faster correction than previously.

Anyone else think so?

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  • 331 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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