House price need to fall by 50%

20goto10

ionapaul wrote: »

The market needs investors to provide a service;

There's currently an oversupply in the rental market. The market can do just fine without investors "services".

Calina

There is also an oversupply in residential sales. In both cases, downward pressure on prices will apply.

20goto10

MG wrote: »

This is not a rip off, it's the normal functioning of the market. High yields attract investors in until yields fall, investors leave low yields to searh for better investments until falling dmand drives yields higher.

A situation with no yields, is not "perfect", it's impossible

Again, the problem with economists is they cannot think outside the box. There is the way things are supposed to work and nothing else. Wake up and have a look around, the way things are supposed to work has been exposed as nothing but a glorified pyramid system. And economists get applauded for saying let's go back to the start and do it all over again. Everyone can see through the bull****. It's time for some fresh ideas.

20goto10

Calina wrote: »

There is also an oversupply in residential sales. In both cases, downward pressure on prices will apply.

Yes I totally agree. Supply and demand should dictate prices. Not potential profit for investors.

MG

20goto10 wrote: »

Again, the problem with economists is they cannot think outside the box. There is the way things are supposed to work and nothing else. Wake up and have a look around, the way things are supposed to work has been exposed as nothing but a glorified pyramid system. And economists get applauded for saying let's go back to the start and do it all over again. Everyone can see through the bull****. It's time for some fresh ideas.

Ignore economic fundamentals got us into this mess, ignoring them are hardly going to get us out of it no matter how much you wish

ZYX

MG wrote: »

No he's talking about a simple yield calc. Inflation is not added on to the yield. It's quite simply rent divided by value. If you want to factor inflation, then you do it on both rent and value - i.e. no impact to yield

I know he is talking about rental yield but it implies a return of 12% if inflation is on average 5%. After expenses it is still 10% return.

For example imagine saying to someone do not invest in shares unless you are pretty sure you are going to get a total return, after expenses, of 10% a year (dividend and capital growth combined)

How many people have pension funds returning 10% a year after expenses?

I have asked this already, but where else would you put your money and expect toget this kind of return? Not just might get but expect to get or else you wouldn't invest.

MG

20goto10 wrote: »

Yes I totally agree. Supply and demand should dictate prices. Not potential profit for investors.

Rents and value are a function of supply and demand, therefore so are yields.

20goto10

MG wrote: »

Ignore economic fundamentals got us into this mess, ignoring them are hardly going to get us out of it no matter how much you wish

I'm not saying ignore them, I'm saying come up with new ones. Economic fundamentals applied to housing is the problem. I don't claim to know the solution but I do know doing it all again is not it!

20goto10

MG wrote: »

Rents and value are a function of supply and demand, therefore so are yields.

Nicely squared off there. As in box shaped ;-)

MG

ZYX wrote: »

I know he is talking about rental yield but it implies a return of 12% if inflation is on average 5%. After expenses it is still 10% return.

For example imagine saying to someone do not invest in shares unless you are pretty sure you are going to get a total return, after expenses, of 10% a year (dividend and capital growth combined)

How many people have pension funds returning 10% a year after expenses?

I have asked this already, but where else would you put your money and expect toget this kind of return? Not just might get but expect to get or else you wouldn't invest.

No inflation doesn't come into it in this way. The yield formula is simple - here's an example:

Annual Rent/Value e.g. 10,000/142,857 = 7% (if DMcW is right )

now a yar later after 5% inflation (let's assume rental inflation and house price inflation as the same for a sec)

After 1 year (10,000*1.05)/(142,857*1.05) = 7%

In the short term, rental and house price inflation will probably not be the same. However, over the long term they wil tend to be the same as supply and demand works through the system on housing stock.

There is no implication of the 7% yield being after inflation.

ZYX

MG wrote: »

Rents and value are a function of supply and demand, therefore so are yields.

Which is why a rental yield of 7% will not happen.
How many people would continue to rent if it was cheaper to buy which it would be if rent was 7%? So less rent and more buy, pushing rents down and property prices up.

How many would invest if rental yields were 7%. Huge numbers (even Ionapaul would invest in Ballygobackwards on those figures) so again prices would go up due to demand and rents would go down due to supply. Simple supply and demands dictates Ireland is not some special case as McWilliams would have us believe. Nowhere else has average rental yields of 7% neither will Ireland.

MG

20goto10 wrote: »

I'm not saying ignore them, I'm saying come up with new ones. Economic fundamentals applied to housing is the problem. I don't claim to know the solution but I do know doing it all again is not it!

I'll work on new economics fundamentals if you work on new physics fundamental...that gravity thing is really bringing me down

ZYX

MG wrote: »

No inflation doesn't come into it in this way. The yield formula is simple - here's an example:

Annual Rent/Value e.g. 10,000/142,857 = 7% (if DMcW is right )

now a yar later after 5% inflation (let's assume rental inflation and house price inflation as the same for a sec)

After 1 year (10,000*1.05)/(142,857*1.05) = 7%

In the short term, rental and house price inflation will probably not be the same. However, over the long term they wil tend to be the same as supply and demand works through the system on housing stock.

There is no implication of the 7% yield being after inflation.

It implies a return of 12%.
Using your example.

Buy a property for €142,587
Rent for €10,000
Sell after 1 year for €14,7713.35
Total return €17,126.35 or 12%

20goto10

MG wrote: »

I'll work on new economics fundamentals if you work on new physics fundamental...that gravity thing is really bringing me down

you're suggesting it's natual? That's where we disagree. It doesn't have to Be the nature of things. Unlike physics we can change the constants and parameters.

For example, you could say all house prices must be determined by a set of criteria. Public transport, schools, amenities etc etc.

In fact this is what a normal person would use to determine value in a house. By normal I mean not an investor. But it could be taken further than this by making it legislation. Criteria could be graded and mapped to value. The more criteria you have and the higher their grade, then the higher the value in property.

It would still be possible to make a profit by the way by buying a low grade property with potential.

MG

ZYX wrote: »

It implies a return of 12%.
Using your example.

Buy a property for €142,587
Rent for €10,000
Sell after 1 year for €14,7713.35
Total return €17,126.35 or 12%

OK you're talking about return rather than yield. We also need to differentiate between house price/rent inflation and ordinary inflation. My understanding is that a long term average inflation (say 3%) is built into the 7%. CPI over or under 3% would then require a higher or lower yield to compensate but over the long term the yield would average back to equilibrium. For instance if CPI is 5% then investors would require a yield of 9% to compensate. Inflation (CPI) has a more complex interaction with house prices than your 12% assumptions allow for. Thinking about it how would inflation actually impact house prices. It would probably result in higher interest rates which would dampen house prices, making then less affordable and increase yields.

20goto10 wrote: »

you're suggesting it's natual? That's where we disagree. It doesn't have to Be the nature of things. Unlike physics we can change the constants and parameters.

For example, you could say all house prices must be determined by a set of criteria. Public transport, schools, amenities etc etc.

In fact this is what a normal person would use to determine value in a house. By normal I mean not an investor. But it could be taken further than this by making it legislation. Criteria could be graded and mapped to value. The more criteria you have and the higher their grade, then the higher the value in property.

It would still be possible to make a profit by the way by buying a low grade property with potential.

Perfectly natural, like an economic Mother Nature. I think your suggestion of pricing based on criteria has just a few flaws. Who would decide these criteria - Fianna Fail, you, David McWilliams, Karl Marx?

20goto10

Perfectly natural, like an economic Mother Nature. I think your suggestion of pricing based on criteria has just a few flaws. Who would decide these criteria - Fianna Fail, you, David McWilliams, Karl Marx?

Well there would need to be a regulator, nothing new there in the Irish system. As for who decides, well they've already been decided by home buyers. I'm talking about pricing homes based on the common criteria that everyone looks for in a home. Square footage, semi-d, garden, public transport, recreational areas, amenities, crime rate etc etc

ZYX

MG wrote: »

OK you're talking about return rather than yield. We also need to differentiate between house price/rent inflation and ordinary inflation. My understanding is that a long term average inflation (say 3%) is built into the 7%.

It would make more sense if inflation was built into the 7% but according to McWilliams (and indeed to your earlier comments) it is not.

MG wrote: »

Thinking about it how would inflation actually impact house prices. It would probably result in higher interest rates which would dampen house prices, making then less affordable and increase yields.

I am not sure what point you are trying to make here but as Ireland has no control over ECB interest rates I think any correlation between Irish House prices and ECB interest rates is spurious.

MG

20goto10 wrote: »

Well there would need to be a regulator, nothing new there in the Irish system. As for who decides, well they've already been decided by home buyers. I'm talking about pricing homes based on the common criteria that everyone looks for in a home. Square footage, semi-d, garden, public transport, recreational areas, amenities, crime rate etc etc

So you think the market should decide the price. So do I – why do we need criteria put into legislation?

ZYX wrote: »

It would make more sense if inflation was built into the 7% but according to McWilliams (and indeed to your earlier comments) it is not.

I think you may be misinterpreting what I mean by built in. A 7% long term yield has an expectation of an underlying long term inflation rate. High yields and high house price inflation do not generally go together – so in the long term yields should average out.

ZYX wrote: »

I am not sure what point you are trying to make here but as Ireland has no control over ECB interest rates I think any correlation between Irish House prices and ECB interest rates is spurious.

No correlation between interest rates and house prices? I’m not even going to bother arguing with you on that one. It is certainly one of the drivers of house prices.

ZYX

MG wrote: »

I think you may be misinterpreting what I mean by built in. A 7% long term yield has an expectation of an underlying long term inflation rate. High yields and high house price inflation do not generally go together – so in the long term yields should average out.

Yes it should, but in this case it does not. This is quite clear from McWilliams statements. His yield is the rental income only.

MG wrote: »

No correlation between interest rates and house prices? I’m not even going to bother arguing with you on that one. It is certainly one of the drivers of house prices.

You said Irelands inflation would affect ECB rates

"how would inflation actually impact house prices. It would probably result in higher interest rates. "

My point is that it would not.

MG

ZYX wrote: »

Yes it should, but in this case it does not. This is quite clear from McWilliams statements. His yield is the rental income only.

Yes yields is only rental income but this yield is intended to cover inflation, not to be over and above it. The problem with your example is assuming that inflation = house price inflation = rental income. In reality the exceptional returns offered by this assumption would result in a speculative movements which would drive yields down until the pressure to return to long term equilibrium. While the first mover might experience exceptional gains if he got out at the right time, the market would not.

ZYX wrote: »

You said Irelands inflation would affect ECB rates

"how would inflation actually impact house prices. It would probably result in higher interest rates. "

My point is that it would not.

This is a case of the dog that did not bark. Inflation should have been curbed by an interest rate hike. Because Ireland alone could not do that it resulted in unsustainable property bubble. We are currently deflating that bubble back to fundamentals.

ZYX

MG wrote: »

Yes yields is only rental income but this yield is intended to cover inflation, not to be over and above it. The problem with your example is assuming that inflation = house price inflation = rental income.

For the 4th and last time MG the 7% does not cover inflation. In a stable housing market, in the long term house prices should match inflation. This leads to a stable market, above inflation means bubble, below inflation leads to houses being worthless. According to McWilliams rents track house prices. So if rents go up with inflation then house prices also go up with inflation. He discounts the effect of inflation saying property does not produce a significant "capital gain". As you said yourself

"No inflation doesn't come into it in this way. The yield formula is simple - here's an example:

Annual Rent/Value e.g. 10,000/142,857 = 7% (if DMcW is right )

now a yar later after 5% inflation (let's assume rental inflation and house price inflation as the same for a sec)

After 1 year (10,000*1.05)/(142,857*1.05) = 7%

In the short term, rental and house price inflation will probably not be the same. However, over the long term they wil tend to be the same as supply and demand works through the system on housing stock.

There is no implication of the 7% yield being after inflation"

MG wrote: »

In reality the exceptional returns offered by this assumption would result in a speculative movements which would drive yields down until the pressure to return to long term equilibrium. While the first mover might experience exceptional gains if he got out at the right time, the market would not.

Which is precisely why he is talking rubbish. To state property prices should always be 14 times the yearly rental income is nonsense. The speculative movements would drive yields down. He used bogus property prices, bogus rent prices and used a bogus formula. In short his article was rubbish.

20goto10

Zyx is right. You cannot talk about rental yield without taking inflation into account. It's very simple, if your rental yield is 7% and inflation is at 4% then your actual yield is really 3%. Inflation does not miraculously disappear by adding it to both sides of the equation!

20goto10

MG wrote: »

So you think the market should decide the price. So do I – why do we need criteria put into legislation?

To end the exact thing we are discussing here - Homes as investments. It could initial be applied to the affordable housing scheme, the point of which is to prioritise homing people over making profit.

stevedublin

MG wrote: »

Just a quick one on whether D McW's theory might be correct

Unemployment: Aug 06: 11.4% Aug 09: 12.4%

Av House Prices: Aug 06: 89k Jul 09: 239k

CPI: 1996: 6455 2008: 9702 (change 50%)

Aug 06 House price adjusted to 2008 CPI 133k (44% lower)

Stats from Status Ireland

shouldnt that be 96 not 06?
I think average house prices were > 89k in August 06!

MG

ZYX wrote: »

For the 4th and last time MG the 7% does not cover inflation. In a stable housing market, in the long term house prices should match inflation. This leads to a stable market, above inflation means bubble, below inflation leads to houses being worthless. According to McWilliams rents track house prices. So if rents go up with inflation then house prices also go up with inflation. He discounts the effect of inflation saying property does not produce a significant "capital gain". As you said yourself

"No inflation doesn't come into it in this way. The yield formula is simple - here's an example:

Annual Rent/Value e.g. 10,000/142,857 = 7% (if DMcW is right )

now a yar later after 5% inflation (let's assume rental inflation and house price inflation as the same for a sec)

After 1 year (10,000*1.05)/(142,857*1.05) = 7%

In the short term, rental and house price inflation will probably not be the same. However, over the long term they wil tend to be the same as supply and demand works through the system on housing stock.

There is no implication of the 7% yield being after inflation"




Which is precisely why he is talking rubbish. To state property prices should always be 14 times the yearly rental income is nonsense. The speculative movements would drive yields down. He used bogus property prices, bogus rent prices and used a bogus formula. In short his article was rubbish.

A 7% yield (or thereabouts) is an equilibrium, where investors can be tempted into the market but only just and without the expectation of capital gain. Yields will always cycle over and under this point (it’s not a constant in other words). Yield does not equal return for the majority of the market, nor does return equal yield plus inflation. Taking a single person example can show exceptional returns or exceptional losses but not for the market.

The notion that property inflation is driven by inflation is a slight misconception. More correct to say that inflation is a benchmark return and in a competitive market, exceptional returns are not sustainable, so house price gains fall to a reasonable level. General inflation in the short term probably even has a negative correlation to house prices as it goes through property cycles. If general inflation were the driver of house price inflation, then an investor would not worry about an empty property as he would still be getting a return to cover inflation, people would be building houses everywhere just to hedge their cash against inflation. Any yield plus inflation equilibrium cannot hold true as market entrants pressure yields and returns.

A rational investor will regard yield as a known return but capital gain as bonus. Because capital gains are not guaranteed while yields are more stable, it drives entry and exits. Your yield plus inflation = return model above simply fails because of the short term impact of likely capital gains which the yield implies. There is a good reason for the website you mentioned to reference yields and for yield levels to average around the 7% mark.

MG

stevedublin wrote: »

shouldnt that be 96 not 06?
I think average house prices were > 89k in August 06!

True enough alright!

ZYX

MG wrote: »

A 7% yield (or thereabouts) is an equilibrium, where investors can be tempted into the market but only just and without the expectation of capital gain. Yields will always cycle over and under this point (it’s not a constant in other words). Yield does not equal return for the majority of the market, nor does return equal yield plus inflation. Taking a single person example can show exceptional returns or exceptional losses but not for the market.

The notion that property inflation is driven by inflation is a slight misconception. More correct to say that inflation is a benchmark return and in a competitive market, exceptional returns are not sustainable, so house price gains fall to a reasonable level. General inflation in the short term probably even has a negative correlation to house prices as it goes through property cycles. If general inflation were the driver of house price inflation, then an investor would not worry about an empty property as he would still be getting a return to cover inflation, people would be building houses everywhere just to hedge their cash against inflation. Any yield plus inflation equilibrium cannot hold true as market entrants pressure yields and returns.

A rational investor will regard yield as a known return but capital gain as bonus. Because capital gains are not guaranteed while yields are more stable, it drives entry and exits. Your yield plus inflation = return model above simply fails because of the short term impact of likely capital gains which the yield implies. There is a good reason for the website you mentioned to reference yields and for yield levels to average around the 7% mark.

I am not saying inflation drives property prices but simply in the long term (30 years or so) if average inflation is 5% a year, then average house price inflation will be about 5% a year also. It may be a bit more, it may be a bit less.

David McWilliams is saying "the value of a house should be 12-14 times its annual rent" So after 30 years if house prices have not gone up at all in that time then you will have earned on average 7% a year on your initial investment. (ie if 0 inflation, you get 7%) If however after 5 years rents have gone up by 10%, then your house must still be 14 times the rent, so the price of the property must also go up 10%. (so you still get a yield of 7% but also a capital return of 10%. Your 7% yield is now on the higher price rather than on your initial investment)

As he says "over time, property should trade on a price/earnings (P/E) ratio of 14 times" The yield does not imply inflation any more than PE ratios imply inflation. Any gain in property prices is after the 7% rental income so it has to be added on.

If you are starting at a point where property prices are 14 times rent then after say 30 years the price of that property will have gone up. I know it is not guarenteed but any increase is added on to the profit

MG

ZYX wrote: »

I am not saying inflation drives property prices but simply in the long term (30 years or so) if average inflation is 5% a year, then average house price inflation will be about 5% a year also. It may be a bit more, it may be a bit less.

David McWilliams is saying "the value of a house should be 12-14 times its annual rent" So after 30 years if house prices have not gone up at all in that time then you will have earned on average 7% a year on your initial investment. (ie if 0 inflation, you get 7%) If however after 5 years rents have gone up by 10%, then your house must still be 14 times the rent, so the price of the property must also go up 10%. (so you still get a yield of 7% but also a capital return of 10%. Your 7% yield is now on the higher price rather than on your initial investment)

As he says "over time, property should trade on a price/earnings (P/E) ratio of 14 times" The yield does not imply inflation any more than PE ratios imply inflation. Any gain in property prices is after the 7% rental income so it has to be added on.

If you are starting at a point where property prices are 14 times rent then after say 30 years the price of that property will have gone up. I know it is not guarenteed but any increase is added on to the profit

At 7% (approx historic average level), the market can be said to be in equilibrium. An investor has no knowledge of whether house prices will rise or fall. High yields or low yields do give this signal to investors. Below the equilibrium, investors will be inclined to exit the market because of low yields and the overpriced signal. Above is the opposite. At equilibrium is just enough to tempt an investor into the market without the expectation of capital gain. This is why it is not possible to say McWilliams is implying a yield + inflation return. I realise it’s a complex and subtle difference but the market is considering both the short term and the long term when pricing and the price is determined by the next player in – who is deciding where to put money in the short and long term to maximise gains. I understand the reason for your view but the long term likelihood of capital gains does not impact on the yield equilibrium.

MG

ZYX wrote: »

Any gain in property prices is after the 7% rental income so it has to be added on.

Actually, what do you think the average yield should be?

Money Shot

MG wrote: »

Just a quick one on whether D McW's theory might be correct

Unemployment: Aug 06: 11.4% Aug 09: 12.4%

Av House Prices: Aug 06: 89k Jul 09: 239k

CPI: 1996: 6455 2008: 9702 (change 50%)

Aug 06 House price adjusted to 2008 CPI 133k (44% lower)

Stats from Status Ireland

I assume there are a few typos in there, three to be exact, and you mean 1996 for a lot of those figures and not 06 as the unemployment rate and av house price are just way off ???