The ‘Greater Fool Theory’ is driving the UK housing market

The ‘Greater Fool Theory’ is driving the UK housing market

Published on 14/10/2013

The national average rental yield is 6.1% which equates to a 5% net rental yield. Rents have grown approx. 2.5% pa over the last 10-15 years and, if we assume that the price to income ratio reverts steadily to its long run median level over the next 5 years we lose 3.8% pa in capital value.

Adding the three components we have 5% plus 2.5% less 3.8%, giving a return of just 3.7%. With the current 5 year 75% LTV mortgage rate at 5.5%, the real cost of the mortgage after inflation becomes (2.5)%.

Aside from the fact that housing overvaluation effectively transfers wealth from the young to the property-owning old, when the obligation for government debt is going the other way, the housing market is being held aloft on the expectation that prices will rise indefinitely. It is an exemplary demonstration, as only the UK housing market knows, of the “greater fool theory” of asset pricing: someone will always give you more than you paid. 

Nothing changes….…

(O Marson, Lombard Odier)

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