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Objective Developer

Yield Is A Measure Of Risk

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You see, yield is a product of risk. Idiots know this. I’m an idiot, and I know this, and loads of you are idiots too, and you know this all too well.

Low risk investments are low yield. Government bonds for example. Prime commercial property. Houses. All historically low risk.

Except, as a housing bubble emerged, rather than re-pricing the risk for a collapsing market, people went the other way. They reduced their yields in the face of rising risk, rather than increasing it. Which leads to two possible conclusions: Asset prices are too high, or incomes from the asset are too low.

Now, these two options can be evaluated logically, and the relative merits weighed up. Let’s do a basic appraisal now:

Prices are too high – yield (income over and above expenditure) is low or negative, and therefore the asset does not perform as a yielding investment. Therefore you are relying on capital appreciation to compensate for your lack of true yield, which is released at point of sale. Now, ‘a bird in the hand is worth two in the bush’ kind of sums up this type of investment; you’d want a rock-solid future for your asset, and a distinct absence of any bubble-like tendencies.

Income is too low – Now, this is a non-argument if you ask me, as asset prices for investment should be lead by yield, which in turn is lead by income. Example: rent is £500 pcm, you want to make 10% gross, so the sum would be (£500 x 12 = £6000 per annum) £6000 x 100 / 10 = £60,000. Therefore an asset generating £500 pcm is worth around £60k if you want to gross 10% (which I think is about right). You can’t (or shouldn’t) do it the other way round – set the rent to justify the asset price, which is what has been happening here.

I think what I’m basically saying is that almost everyone (banks included) has misunderstood the concept of risk very badly indeed, and now we are about to pay the very heft price.

Free lunch? No such thing.

Edited by Objective Developer

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Two things to add;

a) The risk premium is over a risk free rate. Therefore in times of low interest rates, you would expect overall yield compression and therefore capital appreciation over and above £ yield increase.

b)Houses are leveraged assets, which accelerates the increase described in a)

But yes, you're right.

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Two things to add;

a) The risk premium is over a risk free rate. Therefore in times of low interest rates, you would expect overall yield compression and therefore capital appreciation over and above £ yield increase.

b)Houses are leveraged assets, which accelerates the increase described in a)

But yes, you're right.

I'm always right.

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interesting and in the most part i agree.

the main point i agree with is expected changes in the capital value of property should be excluded in calculating property values. seems so obvious when you say it but id say more than 50% of buys over the past 5 years have been based on this.

additionally valuing a house on what similar houses sell for is madness. eqiuvalent to 'if everyone jumped over a cliff, would you?'.

you're right it only reveals price not value.

ive heard so many times that rent is a waste of money. but the argument is always 'why should you pay someone elses rent'. people dont seem to do the maths comparing rent against interest costs. or if they do inthe current climate and decide property is a good investmetn they must also be inclduing an expected increase in capital values or need a new calculator.

while we're on the subject. the number of times i hear equity 'professionals' justifying their buys based on:

1. its high yield

2. its fallen so much already this year

makes me wonder whether they ignore all their financial training.

you should value property based on discounted rentals saved and equities on discounted cashflows. imo :P

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interesting and in the most part i agree.

the main point i agree with is expected changes in the capital value of property should be excluded in calculating property values. seems so obvious when you say it but id say more than 50% of buys over the past 5 years have been based on this.

additionally valuing a house on what similar houses sell for is madness. eqiuvalent to 'if everyone jumped over a cliff, would you?'.

you're right it only reveals price not value.

ive heard so many times that rent is a waste of money. but the argument is always 'why should you pay someone elses rent'. people dont seem to do the maths comparing rent against interest costs. or if they do inthe current climate and decide property is a good investmetn they must also be inclduing an expected increase in capital values or need a new calculator.

while we're on the subject. the number of times i hear equity 'professionals' justifying their buys based on:

1. its high yield

2. its fallen so much already this year

makes me wonder whether they ignore all their financial training.

you should value property based on discounted rentals saved and equities on discounted cashflows. imo :P

Spot on. I'll chalk you up as a 'non-idiot' along with auk. I'm still not sure that 'idiot' quite covers it for bardon though, I'll have to think about it for a while.

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You see, yield is a product of risk. Idiots know this. I’m an idiot, and I know this, and loads of you are idiots too, and you know this all too well.

Low risk investments are low yield. Government bonds for example. Prime commercial property. Houses. All historically low risk.

Except, as a housing bubble emerged, rather than re-pricing the risk for a collapsing market, people went the other way. They reduced their yields in the face of rising risk, rather than increasing it. Which leads to two possible conclusions: Asset prices are too high, or incomes from the asset are too low.

Now, these two options can be evaluated logically, and the relative merits weighed up. Let’s do a basic appraisal now:

Prices are too high – yield (income over and above expenditure) is low or negative, and therefore the asset does not perform as a yielding investment. Therefore you are relying on capital appreciation to compensate for your lack of true yield, which is released at point of sale. Now, ‘a bird in the hand is worth two in the bush’ kind of sums up this type of investment; you’d want a rock-solid future for your asset, and a distinct absence of any bubble-like tendencies.

Income is too low – Now, this is a non-argument if you ask me, as asset prices for investment should be lead by yield, which in turn is lead by income. Example: rent is £500 pcm, you want to make 10% gross, so the sum would be (£500 x 12 = £6000 per annum) £6000 x 100 / 10 = £60,000. Therefore an asset generating £500 pcm is worth around £60k if you want to gross 10% (which I think is about right). You can’t (or shouldn’t) do it the other way round – set the rent to justify the asset price, which is what has been happening here.

I think what I’m basically saying is that almost everyone (banks included) has misunderstood the concept of risk very badly indeed, and now we are about to pay the very heft price.

Free lunch? No such thing.

Forgive my ignorance, o idiotic one, but if I were to buy your £60k asset off you for £30k then my yield is 20% but surely my risk is the same as yours was. Is this invalid because this is part of your free lunch?

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You see, yield is a product of risk. Idiots know this. I’m an idiot, and I know this, and loads of you are idiots too, and you know this all too well.

The only true measure of risk is fear. Fear and dread of the loss of money, status, power and, ultimatley, food on your table. Yield is merely a proxy for that.

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Economic fundamentals mean nothing in the housing boom that has recently just expired.The average sheeple is lost at sentence one, post one of this thread. This has just been cynical showbiz type hype. If an asset class can press certain aspirational buttons in people, and you can wrap it up in a culture that is obsessed with other peoples lives and how other people seem to be richer, sexier, more "successful" than you, then mixed with tried and tested advertising techniques you are on to a winner, for a while. Houses press certain buttons, we all need one, we all want a bigger better one, we all want a bigger better one than the **** next door, "celebrities" have bigger better one`s than the rest of us, and on it goes, if you don`t buy one now you may NEVER "own" one, and what a loser that will make you, you will be like some kind of wino or the tramp that reeks of p*ss in the library. What a crock of Sh*t. The sheeple deserve everything that is coming. Bring on the crash, and let people be less gullible next time. If only.

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  • 295 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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