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Economist Blog entry

 
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PostPosted: Fri May 04, 2012 2:28 pm GMT    Post subject: Economist Blog entry Reply with quote

http://www.economist.com/node/21553459

From Economist blog. There is a couple ideas I find very interesting.

1. They cited a research which looks at the fundamental value of a house not using price/income or price/rent multiples, but the net present value of all future rent (similar to a DCF analysis of a company). When rate falls, the discount rate of rental income is lower so it should boost the value, but if the rate falling is due to a weakening economy, the rental income itself will drop. Thus it is not clear whether rate up/down has a linear relationship with price movement.

2. It cited study that, over the long terms, houses, like gold, should track inflation (i.e. real house price should be flat). So a good store of value but not a good investment.

3. Good comparison with European countries.
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PostPosted: Tue May 08, 2012 10:34 am GMT    Post subject: Reply with quote

Quote:

They cited a research which looks at the fundamental value of a house not using price/income or price/rent multiples, but the net present value of all future rent (similar to a DCF analysis of a company).

That's interesting and probably the foundation for a good way to do it if you have a good way to predict all future rents (which is a big if, unfortunately). I would think it should be all future rents minus costs, though. I skimmed the paper linked from the Economist post and didn't see anything to indicate that carrying costs and transactions costs were subtracted. That's probably OK if you're just doing a comparison to other time periods and countries, as they were, but the costs would be essential to deriving the fundamental value.

Quote:

It cited study that, over the long terms, houses, like gold, should track inflation (i.e. real house price should be flat).

That sounds reasonable too, I would just add that this is also before costs are subtracted. Carrying costs are not insignificant at ~1% annually for property taxes and ~1% for maintenance. There are also transaction costs - the 6% Realtor commission spread over the average owning period of 7 years is close to ~1% when annualized, and I just round to that mentally anyway given the other transaction costs. So that's around 3% a year total, or maybe 2% if you can stay put permanently.

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