From: "Sammy" 
Newsgroups: uk.finance
Subject: Re: The Great House Price Crash 2005
Date: 4 Mar 2005 08:09:48 -0800
   posting-account=76DFZw0AAACl3KL7CfWDzxXkc3NgeQO0


Tim wrote:
> > "Tim" wrote:
> > > So if you accept that inflation and interest rates have
> > > reached a lower level than for the 1980's-90's, you
> > > should also accept that the 3.5 to 4.0 multiple will
> > > reach a higher level - perhaps between 5.0 & 6.0?  :-
> > >
> > > "Anyone who still argues otherwise is living with a
> > > 70s/80s mind-set where high [interest rates] were a very
> > > important factor. However, the [interest rate] landscape
> > > has changed so much as to negate this thinking."
> >
> "Sammy" wrote
> > No, I don't accept that.  There is no justification for
> > a higher multiple if real rates have not declined ...
>
> Of course there is - prices depend on what people can afford!

Only in markets that are exhibiting bubble characteristics.  You
clearly do not understand basic financial theory.  Sustainable prices
depend on the yield the asset can generate.

> "Sammy" wrote
> > The only reason someone would
> > (ir)rationally pay a higher multiple is if he
> > believes house price inflation will continue.
>
> Can't agree.  House purchase is sentimental - most people don't buy
them
> solely for an investment.

Sentimental - means almost the same as irrational in this context.
People wouldn't be so keen to buy if they realised that there was a
very real risk that prices will decline.

> "Sammy" wrote
> > If you disagree with that,  rather than my brief
> > summary, then I'd be very interested to hear why.
>
> Do any ot the issues I mentioned above answer why?

Not really.

You seem to be basing your whole argument on affordability i.e. as long
as the monthly cash flow works out, the buyer can bid-up to the level
he is comfortable.  Just because an asset is affordable at a certain
price does not mean that that price is the asset's intrinsic value.
This is a basic tenet of finance and is also common sense.

What we have in the current housing market is the logical conclusion of
people bidding up prices beyond their intrinsic value to the point
where first time buyers can no longer afford to get on the ladder.
Prices have overshot and are now unaffordable for many FTBs and for
many people wishing to trade up.  As The Economist points out, the
financially attractive alternative of renting is where the smart money
is.