From: "Sammy" 
Newsgroups: uk.finance
Subject: Re: The Great House Price Crash 2005
Date: 4 Mar 2005 11:06:38 -0800
   posting-account=76DFZw0AAACl3KL7CfWDzxXkc3NgeQO0


Tim wrote:
> > > "Sammy" wrote
> > > > There is no justification for a higher
> > > > multiple if real rates have not declined ...
> > >
> > "Tim" wrote:
> > > Of course there is - prices depend on what people can afford!
> >
> "Sammy" wrote
> > Only in markets that are exhibiting bubble characteristics.
>
> ... or in markets where demand exceeds supply.
>
> There are only a limited number of houses in the British Isles, there
are
> restrictions on building new ones, and even when consent is obtained
it
> takes a while to build them.

And we only realised this recently?  What were people thinking before
this great enlightenment?  I haven't noticed the population doubling in
recent years, but prices certainly have.

Could you run by me how a chain of sales would progress if no-one can
afford to buy the property at the bottom?

> "Sammy" wrote
> >  You clearly do not understand basic financial theory.
>
> Really?  [Anyway, why are you resorting to insults?]

OK, but you choose to ignore basic financial theory even if you may be
aware of it.

>
> "Sammy" wrote
> >  Sustainable prices depend on the yield the asset can generate.
>
> Rubbish.  I bought a couple of loaves of bread today - the yield that
they
> can generate is patently zero.
> Did the shop give me the loaves for free?  Fat chance!

Bread does not constitute most people's idea of a capital asset.  It is
a consumable in a highly competitive, liquid market whose price tends
towards its marginal cost of production.

> "Sammy" wrote
> > 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.
>
> Hmmmm.  There is a *very* real risk that the price of PCs will
(continue to)
> decline.  Does that stop people buying them now?

They might rent them instead.  The average PC doesn't cost =A3180,000.

> "Sammy" wrote
> > 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.
>
> Exactly!
>
>
> "Sammy" wrote
> > Just because an asset is affordable at a certain price
> > does not mean that that price is the asset's intrinsic value.
>
> No - the true value is whatever people will pay for it at the time!

As sellers are finding out now.

>
> "Sammy" wrote
> > 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.
>
> That's what happens when there is only a limited supply of an item -
the
> people prepared to pay more for them, get them!
> Which is to say, those people that cannot afford as much as others,
are the
> ones who end up not buying when the supply runs out.

And then what happens?