Wednesday, May 27, 2009

UK House Prices Summer Bounce an Illusion

UK House Prices Summer Bounce an Illusion

The recent up-tick in house prices in UK was a glimmer of hope, I'm sorry to say that I think that's a false dawn.

Posted by nadeem walayat @ 12:00 PM (1214 views)
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8 thoughts on “UK House Prices Summer Bounce an Illusion

  • “Disequilibrium or mispricing can by definition be either “too high” or “too low” and the central notion of the analysis I did was that on average over a long time, markets are priced correctly (that’s another way of saying “markets revert to the mean”, “efficient market hypothesis” and/or “Farrell’s Law #2″ – take your pick).”

    Over a long time? is that a long time a very long time a really long time or is it out of kilter for a long timish. If its out for a long time then wont then tend to miost of the time which then reders the EMH as very vague and not really reliable for most things. IF its only correct for a short term because it undershoots or overshoots an ellibrium figure (which itself is often changing) then where is the value of the indicator?

    The only value is (thinking out loud) that if once it exceeds equillibrium and THEN starts to move back to equilibrium, then it overshoots equilibrium to the downside, then you should only sell if > equilibrium and going down or only buy when < equilibrium and going up.Apart from that - where i might have totally missed his point his conclusions are quite sensible (although he does love a [quite amusing if it wasnt so tragic and true] political rant).

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  • stillthinking says:

    This article is also on Seeking Alpha, but you can’t link to there from hpc for some reason.
    By coincidence, this valuation method has come up before and I think that was in a way the basis of this site because used by Jonathon Davis(name maybe a bit wrong), so probably the more bearish assessments are from this.

    But, although long term interest rates -and- earnings are definitely part of prices, they are not really part of how much people are prepared to pay, at least over the last few years. They are indications, rather, of how much on average banks can safely lend. More of a funding push analysis than a borrowing pull. If you take the view that the analysis is about lending ability, then the downside certainly makes more sense because lending today restricts the equivalent lending tomorrow. In other words, the excesses of the bubble will be removed from transactions in the future to balance. i.e. a house with a long run value of 150K selling for 200K takes 50K from subsequent transactions limiting the price to 100K in the future.

    Whether or not the psychology of the UK has changed away from borrowing is a moot point, probably it has. There are though, without number, of people prepared to borrow whatever they can. Up to the max. So really house prices are a function of bank lending which is itself a function of long term interest rates and earnings, -not- that house prices are a function of earnings/interest rates. this distinction is kind of important because other factors affect bank lending, particularly internationalised lenders such as those in the UK. Also, on another note, the cycle itself might be because of the inherent loop/feedback because bank lending actually drives interest rates, and interest rates drive bank lending.

    So, another potential view for at least a maximum limit on near future prices, if all banks now restricted lending capacity were to be exclusively funnelled into UK housing at the long run average number of transactions, what price level would come from that? Probably not much as we haven’t even maxed out on bank losses yet and won’t for some time.

    I didn’t even think it was a glimmer of hope, just pure b*llox. The crash in UK prices will make history.

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  • techieman
    Yes, the conclusions seem fine, but I would point out that an efficient market does not necessarily have a time-deterministic fair value as he seems to imply (only as an aside); only that there will not be any arbitrage opportunities (this is almost certainly not the case in housing due to the inhomogeneity of the asset class).

    stillthinking said “But, although long term interest rates -and- earnings are definitely part of prices, they are not really part of how much people are prepared to pay”
    – Agreed. People may be prepared to pay almost all of their income as debt payments in some scenarios, and almost none of it in others, and the factors that make up the scenarios are indeed more than just interest rates (perceived market risk, demography, job security, welfare availability, taxation, the list goes on!)
    – I would not, however, attempt to predict an upper bound on the fall using bank capital availability as it can change quickly from other lines of business and is just an upper bound too. Probably better to use a valuation methodology as in the article for price and the implied, lender percieved, market risk, acquired from the spread between money market and mortgage market, for timing.

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  • ^^ that said, if you are “pent up demand” then lookout for your dream property during the downturn and try to get what you think is a fair deal.
    (I’m viewing one on Sat… it is one of two flats that make up an Edwardian house and I wanted to offer on both together if I went for it, but one is already under offer unfortunately – may be able to contact the owner though, since both flats are rented out – bypass the agent and try to get a real deal going!.. hmm would be nice to have a 2300sq ft Edwardian semi in a quiet, leafy part of North London, eh?!)

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  • Thanks for your input 666 and good luck with that deal!!!

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  • techieman – thanks.. probably be the first of many viewings before I find the deal I’m after though!

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  • … & now I get resistance from Mrs 666 to submitting ‘ridiculously’ low offers so as not to alienate ourselves from the EA’s… the flats have asking set at peak (taking pre-peak sold prices from land reg on same build opposite and adding on the gain to peak, it is uncanny) so I suggest taking it down 55%, and really want to start negotiations lower if possible – all this after the agent told us the vendor would take offers. How do I convince her (she isn’t mathematically minded and doesn’t read the press or watch the news very much) / go about putting in these offers without the alienation?

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