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Stability And Revaluing Property


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A lot of business activity depends on a good degree of economic stability, and the same is true of individuals. Apart from the financial risk the housing boom represents highly unstable conditions to many people in the UK, I mean how can you plan anything when the only thing that matters is buying houses in the next few weeks. So I propose that a group of housing experts drawn from the UK building societies and the bulls from this forum (KOTC etc) get together and are allowed to re-value all UK property so that it becomes stable. Presumably there is some level at which property is fair value, say £1M for a semi ? After that we can all relax and stop worrying about what happens next.

Is there a fair value for property or not ?

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Yes, there is a fair value.

Reasonable cost for land + cost to build a house + small profit for builders/developers = Fair value.

£15K for a postage sized piece of land + £60K to build a house + PROFITS = £250K house.... not fair value really. Looks like developers are currently pocketing massive amounts as profit. No wonder they are all reporting strong profits recently :P

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Fair value for property, as we have noted time after time, is what the purchaser is prepared to pay.

No, economists use the notion of fair value when assessing assets and estimate it on the underlying features of the asset. But dont you mean in the UK today that the fair value for a property is whatever the estate agents put it on the market for ?

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A lot of business activity depends on a good degree of economic stability, and the same is true of individuals. Apart from the financial risk the housing boom represents highly unstable conditions to many people in the UK, I mean how can you plan anything when the only thing that matters is buying houses in the next few weeks. So I propose that a group of housing experts drawn from the UK building societies and the bulls from this forum (KOTC etc) get together and are allowed to re-value all UK property so that it becomes stable. Presumably there is some level at which property is fair value, say £1M for a semi ? After that we can all relax and stop worrying about what happens next.

Is there a fair value for property or not ?

But the "fair value" of property is critically dependent on future price trends. If property really was guaranteed to continue increasing at inflation+10% per year, then the "fair value" for property today would be infinite. If it was guaranteed to decrease in real value at 10% per year then the "fair value" would be negligible. It's just not possible to value property at a point in time without reference to future price changes.

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Fair value for property, as we have noted time after time, is what the purchaser is prepared to pay.

Would you say fair value summised is therefore correct (ie) 150k for a "misguided, worried they won,t get on the property market, financed to the eyballs FTB" is fair value?

I don,t believe from your previous posts you would as thats clearly not fair value, its a complete rip off and someone is making a lot of money from someone who cannot afford to lose money (and invariably will do so IMO)!

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Good post zorn.

Makes a lot of sense.

But current FTBs buy with a sense that the market is going to run away from them and continue upwards forever, hence they perceive infinite value from a purchase now.

They may be misled, but if they only expect prices to go up what can they do but buy???

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It's just not possible to value property at a point in time without reference to future price changes.

What the hell? How can you possible value something with reference to something that hasn't happened yet and is by definition unknowable? :rolleyes:

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What the hell? How can you possible value something with reference to something that hasn't happened yet and is by definition unknowable? :rolleyes:

Well, that's my point. You can't set a "fair value" for houses that everyone will agree on, because different people will take different views on the future price changes, which are the biggest single element affecting the value.

But I think you'll find that the financial markets set values on things every second of the day that are based on things that haven't happened yet.

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There used to be a mechanism which ensured a fair value for property I believe - earnings multiples. So lenders sticking to 3.5x salary for example, inevitably provided stability and fair value. Removing the multiple and allowing loose lending plus speculation has removed the fair value proposition.

There is another view - a free market inevitably, according to economic theory, leads to fair value over the long term. Of course, it is not a totally free market (particularly when it comes to access to information), but ultimately I believe this holds true and hence, ultimately, we will see fair value in the market. Bulls would argue that it's therefore already fairly valued because that is what people are paying, bears would say it is way beyond long term historical fair value and therefore only has one way to go - back to long term trend, which is around the 3.5x multiple I think. IMO, it is clearly a cyclical market with a very long cycle, but that inevitably it will return to long term trend and so prices will have to go down. The market will value fairly IMO - but all in good time.

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There used to be a mechanism which ensured a fair value for property I believe - earnings multiples. So lenders sticking to 3.5x salary for example, inevitably provided stability and fair value. Removing the multiple and allowing loose lending plus speculation has removed the fair value proposition.

There is another view - a free market inevitably, according to economic theory, leads to fair value over the long term. Of course, it is not a totally free market (particularly when it comes to access to information), but ultimately I believe this holds true and hence, ultimately, we will see fair value in the market. Bulls would argue that it's therefore already fairly valued because that is what people are paying, bears would say it is way beyond long term historical fair value and therefore only has one way to go - back to long term trend, which is around the 3.5x multiple I think. IMO, it is clearly a cyclical market with a very long cycle, but that inevitably it will return to long term trend and so prices will have to go down. The market will value fairly IMO - but all in good time.

Exactly right. It is only the ridiculous amount of cheap credit pumped into the economy since 2001 that has allowed this situation to develop. Who are the most profitable organiations at the moment....??.....banks....well there's a surprise!!!

It will all end in tears I'm afraid. Always does!

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There used to be a mechanism which ensured a fair value for property I believe - earnings multiples. So lenders sticking to 3.5x salary for example, inevitably provided stability and fair value. Removing the multiple and allowing loose lending plus speculation has removed the fair value proposition.

Earnings multiples were always a bad idea. There is no sense for a financial institution to deny someone a loan that they can easily afford to repay based solely on the blunt instrument of earnings multiples. As just one example of what's wrong with them, your cost of living doesn't increase if you get a pay rise, so if someone taking home £1000 per month can afford to pay £400 per month on their mortgage, then someone taking home £2000 per month can afford £1400 per month -- 3.5 times as much. Affordability calculations allow the banks and building societies to lend more money at lower risk, so I think you'll find they're here to stay.

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The so-called value of an average property depends on what banks are prepared to lend. Pure and simple. If legislation was reintroduced restricting lending to 2.5 times salary, then house prices would reduce accordingly.

Of course banks would then become far less profitable, so we're unlikely to see that happening.

Encouraging people to borrow money, and then charging them money for the priviledge is one of the biggest cons of our time !!

Remove borrowing (never gonna happen, obviously) and you would immediately find out the true fair value of a house !!

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Earnings multiples were always a bad idea. There is no sense for a financial institution to deny someone a loan that they can easily afford to repay based solely on the blunt instrument of earnings multiples. As just one example of what's wrong with them, your cost of living doesn't increase if you get a pay rise, so if someone taking home £1000 per month can afford to pay £400 per month on their mortgage, then someone taking home £2000 per month can afford £1400 per month -- 3.5 times as much. Affordability calculations allow the banks and building societies to lend more money at lower risk, so I think you'll find they're here to stay.

Which is fine until interest rates start approaching 8-9%.

3.5 times earnings is a really sensible way of working out what is affordable long term not just with the current low rates.

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Earnings multiples were always a bad idea. There is no sense for a financial institution to deny someone a loan that they can easily afford to repay based solely on the blunt instrument of earnings multiples. As just one example of what's wrong with them, your cost of living doesn't increase if you get a pay rise, so if someone taking home £1000 per month can afford to pay £400 per month on their mortgage, then someone taking home £2000 per month can afford £1400 per month -- 3.5 times as much. Affordability calculations allow the banks and building societies to lend more money at lower risk, so I think you'll find they're here to stay.

I understand what you're saying, but the problem is that affordability can only be assessed on the current interest rate. The loan is for 25 years so making a loan assessment PURELY on today's rate for that period of time is pretty poor IMO. It is clearly bonkers that people can take a maxed-out 100% mortgage at x5 salary at today's "low" rate and then find they're repossessed because rates have gone up a paltry 0.5%. Giving loans according to today's affordability is IMHO a recipe for disaster.

I would however agree with you if it was a fixed rate 25-year loan - no problems at all since 25-year loans, where available, are a higher rate for the very reason that they attempt to smooth the ups and downs of variable rates. However, that ain't gonna happen, so I really think 3.5x salary is the best and most practical option.

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There is another view - a free market inevitably, according to economic theory, leads to fair value over the long term. Of course, it is not a totally free market (particularly when it comes to access to information), but ultimately I believe this holds true and hence, ultimately, we will see fair value in the market.

You mean "the market price will tend towards the fair value"

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Fair value for property, as we have noted time after time, is what the purchaser is prepared to pay.

"Fair Value" (the financial deifnition) has nothing to do with what people will pay for an asset. It is an attempt to assign a true monetary value to an aseet - with acknowledgement that the Market Value (i.e. what people will pay) may deviate from the "Fair Value"

The fair value of an asset would not follow the path of UK house prices without extreeme changes in the external economic conditions. That is why Fair Value is a better indicator in the long run of where the price will tend towards in the future

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But the "fair value" of property is critically dependent on future price trends. If property really was guaranteed to continue increasing at inflation+10% per year, then the "fair value" for property today would be infinite.

Not true. Multiplying any two non-infinate numbers andything less than an infinite amount of times will always results in a number which is less than infinite. If you want to apply infinite time to your 10% increase so that your argument holds then that would also be true for any percent increase no matter how small

But the "fair value" of property is critically dependent on future price trends.

No Fair Value attempts to assign an amount which represnts what it is really worth (given that speculative price fluctuations are unpredictable). A way (only as an example) to do so would be to calculate the cost of alternative accomodation + a factor for the security of long tenure. This figure would then be refined by other variables revolving around what a house gives you guaranteed wrt to the cost of those same things without a house. This TRUE value i.e. the Fair Value may not be what the market will Pay. But in a well functioning Market the Market value will in time tend towards the True value. The UK is not a well functioning market. It is a cartel where the participants have little choice.

An example from finance is that the Fair Value of a bond is the present value of all future cashflows of the bond. In times of high risk or uncertainty the bonds market price might trend away from the fair value. But it will converge with the Fair Value at redemption.

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I understand what you're saying, but the problem is that affordability can only be assessed on the current interest rate. The loan is for 25 years so making a loan assessment PURELY on today's rate for that period of time is pretty poor IMO. It is clearly bonkers that people can take a maxed-out 100% mortgage at x5 salary at today's "low" rate and then find they're repossessed because rates have gone up a paltry 0.5%. Giving loans according to today's affordability is IMHO a recipe for disaster.

I would however agree with you if it was a fixed rate 25-year loan - no problems at all since 25-year loans, where available, are a higher rate for the very reason that they attempt to smooth the ups and downs of variable rates. However, that ain't gonna happen, so I really think 3.5x salary is the best and most practical option.

No, because there's still some inflation in the system to bail people out. In five years' time, with annual earnings growth of 3%, you can take a mortgage rate rise from 6% to 7% and simply be paying the same proportion of your salary as you were at the start of the mortgage. It's nothing like as quick as it was in the high inflation 70s and 80s, but the effect is still there. And in compensation, interest rates are much more stable than they were in the 80s -- it's safer to lend 5x salary with a risk that base rates will go from 4.75% to 6% over the next give years than to lend 3x salary with a risk that base rates will go from 10% to 15% in the next six months.

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Think you've got it spot on Wuluf. However, it depends on what is meant by "fair value" - if it is the economic definition then you are quite right - but I doubt people can understand how this would be calculated in the way you rightly suggest or be able to run some form of discounted cash flow to come up with a current valuation based on future prices/rents.

If the OP meant "fair value" in the layman's sense, then this is slightly different - I'd probably say the only way to judge a layman's "fair value" is not to base it on a view on future pricing, but to base it on long term historical trend, because as we've both said that free market long term trend has smoothed out the short term peaks and troughs in the market. As we all know, there are plenty of charts on this site showing what today's property prices would be if the long term trend had been followed over the last few years.

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...base it on long term historical trend, because as we've both said that free market long term trend has smoothed out the short term peaks and troughs in the market.

Yep.. But I also noted that the UK housing market is not a "fair" one.

It has been slightly skewed to profiteering from day one.

I wouldnt even want to start working of the Fair value of residential property. But as I would imagine that any such figure would also have to take into account income and some measurement of what the "average" person should have access to and hence what proportion of his disposable salary should be consumed by accomodation.

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Yep.. But I also noted that the UK housing market is not a "fair" one.

It has been slightly skewed to profiteering from day one.

I wouldnt even want to start working of the Fair value of residential property. But as I would imagine that any such figure would also have to take into account income and some measurement of what the "average" person should have access to and hence what proportion of his disposable salary should be consumed by accomodation.

I think we disagree slightly on this one. I would say that over the long term it is a fair market, but that at any one time it is typically unfair: Assuming a 14-year market cycle as has been suggested on this web site, for the bulk of that time (ref. historical cycles) the market is ahead of long term trend, and therefore by definition "unfair". However, on the way down it hits a point which I think could be described as "fair". Market crashes usually overshoot though, so in a small part of the cycle - at the bottom of it - prices are also "unfair", but this time in favour of new buyers as opposed to sellers. So the market pretty much is always unfair at any one time but conversely always fair in the long term.

Is there any aspect of it being "unfairness" that you think is uppermost? I do agree that it is not a totally free market and so there are many other unfair elements in it. In my original post I said that one of the main areas of disadvantage was access to information - those with the best, most timely and most accurate information typically have vested interests in price increases. There is another aspect of fairness which is very pertinent on this site - a lot of people are angry that they cannot get on the market and hence feel this is unfair. Sentiment and culture create unfairness, but I would strongly argue that it is possible for people to take well-informed decisions - however, it means they have to have an iron will, do research, ignore their peers, ignore the media and, above all else, stay patient. Not many people appear to be able to do that - hence the bubble. So I would say the market is actually fair - but it takes a strong personality to make his/her own choices and stay away from the herd. Survival of the fittest? We'd better not go into Darwinism and free markets! ;)

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Is there any aspect of it being "unfairness" that you think is uppermost? I do agree that it is not a totally free market and so there are many other unfair elements in it. In my original post I said that one of the main areas of disadvantage was access to information

Unfair: In the sense that there is compulsion to buy as there is no direct alternative (socially) in the UK.. This has lead to unfiar pricing.. e.g. In the telecoms market governments alwas intervene to ensure that there are alternatives. This leads to competition. If for example council housing was readily available for all then prices would not be as high as they are. I would imagine that council house rents are set at what the government thinks is a fair value for its return on investment i.e. covers costs. Well take this and add on an IR factor and maybe something for higher private rather than public employment costs and lack of economy of scale. Yes governments MIGHT have longer timescales BUT this could be factored in.

Information: Agree. If the UK housing market was like the fairly (relatively) well regulated UK financial markets some of the recent press reports and property survey conclusions would lead to prosecutions or worse.

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the "fair value" of property is critically dependent on future price trends. If property really was guaranteed to continue increasing at inflation+10% per year, then the "fair value" for property today would be infinite.

I am struck by similarities between Zorn's method of valuing properties and Joseph Stiglitz's definition of an asset market bubble:

Joseph Stiglitz [the Nobel-prize winning economist]'s definition of a Bubble:

"If the reason the price is high today is because investors believe that the selling price will be high tomorrow - when fundamental factors do not justify such a price - then a bubble exists."

http://www.safehaven.com/article-1680.htm

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  • 443 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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