It’s time to face the music and address the house price problem

Loughton_Monkey

You're perfectly correct, Cleaver.

But somehow, house prices seem to bring out the most emotional and ill-informed claptrap on these boards.

House prices react in virtually the same way as your share chart. What people fail to understand, I think, is that the timescale is infinitely slower. Anyone looking at a graph of share prices - say the FTSE - can 'prove' almost anything by looking at the last 20 minutes (definite upward trend), or the last hour (definite downward trend). If you are buying a share hoping to sell at a profit in the next 20 minutes, then yes, look at the last 20 minutes. If you are looking to buy a share for the next year, look at how it has performerd over the last year.

Any sensible investor having bought Tesco shares in their ISA would not sit there between 10:30 a.m and 10:35 a.m. talking complete drivel about how they have just gone up 2 points. Oops! They've just gone down 3 points. No! Hang about! 5 points up. Oh crikey. Not moved in the last 30 seconds........

The key issue we have with House Prices is the complete idiots on these boards (and this applies to bears and bulls) is that [in the equivalent timescales of shares] they are looking to invest for a year, but zooming in on the last 30 minutes of data.

What makes it worse - just like shares when there is a 'lull' or 'dead period' in which very few people are buying and selling - is that house price data currently is totally unreliable Firstly because of the extremely small dataset, and secondly because of the huge 'politics' and 'vested interests' people seem to have in distorting the position.

saleda

I fail to see what a market, involving millions of low value sales daily, has to do with the accuracy of the price of an individual house that may only sell once every 10 years.

It's obviouslly a good way of avoiding the point.

You now claim there is no ''right price'', having previouslly said that the ''right price'' is is the price agreed for a particular property between the seller and the buyer. These are the only two people who set the right price, as presumably they are both happy with the final figure.

Loughton_Monkey

saleda wrote: »

I fail to see what a market, involving millions of low value sales daily, has to do with the accuracy of the price of an individual house that may only sell once every 10 years.

The Shares market and House price market are far more similar than most people imagine. They do behave in extremely similar ways. Once people recognise that they will understand why 99% of claptrap about 0.3% movements in a month are complete ill informed drivel provided by those who are 'none too tightly wrapped'.

But the key difference is timescale. As you say, an average house might sell every 10 years. In the shares market, a single specific share might get traded 4 times a day. Both markets consist of a mammouth holding, only a small %age of which changes hands in any one period. And for those few that change hands, almost every deal is slightly different from the one before. Up ½ a penny. Down 1 penny....

Apart from the timescale (X Axis), a graph of a share price and a graph of house price show exactly similar traits. There is a long term trend, there are bubbles, corrections, crashes, recoveries, periods of level pricing, high volume, low volume..... And the same type of fundamental or technical analysis can be applied in exactly the same way to both.

The only other very small difference is that one Barclays Bank share is exactly similar to another Barclays Bank share. However, no house is ever exactly the same as the one next door. Even for new ones. There are always small differences like the size/shape of the garden or plot, the way it's been looked after/extended, the degree to which it is overlooked, the way in which the garden has been tended or neglected.....

Loughton_Monkey

saleda wrote: »

You now claim there is no ''right price'', having previouslly said that the ''right price'' is is the price agreed for a particular property between the seller and the buyer. These are the only two people who set the right price, as presumably they are both happy with the final figure.

You fail to understand 'context'.

When I sell you 100 Barclays Bank shares for 302.1 pence, that is the "Right Price" for that trade, for that number of shares, at that time.

Two seconds later, someone else sells 1,000 Barclays Bank shares for 302.2 pence. Again, that is the "Right Price" for that trade, for that volume, at that particular time.

But go and ask your Stockbroker's advice about what is the "Right Price" for a Barclays Bank share, then you have to understand that [pedantically] he cannot answer precisely. He can only guide you that it is 'probably' worth 'around' 302.0 to 302.3.

The 'Right Price' lasts simply for one millisecond before it is overtaken by a new 'Right Price'. In the house market, it's the same millisecond at which you and I sign contracts at £249,950.

This doesn't in any way guarantee either that (a) you could sell the same house one week later for £249,950, or (b) my next door neighbour's house has a 'Right Price' of £249,950

A 'True Market Price' can only pertain to a specific transaction. A 'Market Price', therefore, for a very similar transaction, can only be quoted within a range, and even then is only an estimate - especially if in the following millisecond, Barclays Bank goes bust. Or if the council publicises a new by-pass going right through my garden.

HAMISH_MCTAVISH

Cleaver wrote: »

Hamish, Generali... anyone? A little help here? Please?

It's not an explanation problem, it's a comprehension problem....

the_flying_pig

Cleaver wrote: »

I think this is the last time I'll post on this thread, but just to give it one last try...

It is not up to you, me or anyone else to decide what is a good, bad, high or low price in a market. Of course we can have an opinion, but it's just an opinion. There is no 'stupid' price, there is no 'right' price, there is no 'wrong' price. In any market with multiple assets being sold, the market will find the market value price based on a number of external factors.

So one last try. A man is selling an apple and puts it up for sale for £1. Someone offers him 50p. They barter for a while and settle on 76p. The market value of that apple is therefore 76p. It doesn't matter if you think this expensive, or that I think it's cheap, that's the market value of that apple.

Put together thousands of apple sellers with thousands of apple buyers and what you have is an apple market, where the prices of apples fluctuates from second to second based on a wide range of external factors. Let's say that an average of 100,000 apples are sold every day in this make-believe apple market for between 75p and 77p, and this has been the price range for a month. But suddenly people start buying them for 80p, then 90p. For the next months apples are bought for between 90p and 91p.

We can debate for ages whether the apples are 'worth' 90p, or whether 90p represents good or bad value, or the external factors that have caused apples to suddenly cost 90p. But none of this matters, because the market price of an apple is now 90p. It matters not whether people pay with cash or with credit, as these are just examples of external factors which have effected a price. You can shout until you're blue in the face that an apple isn't 'worth' 90p, but it is, because the market price for an apple is now 90p.

Is any of this making sense yet? It's pretty much how any market in the world works. Hamish, Generali... anyone? A little help here? Please?

great stuff but pretty much worthless IMO other than satisfying a very specific definition of 'value' or 'worth' that you've not been good enough to share with us [or explain why it's important].

let's think of a few reasons why we might be interested in what a house is 'worth':

(a) I'm person X, a would-be house buyer going into a negotiation, thinking about the highest bid that I'll make before walking away;

(b) I'm a would-be house seller going into a negotiation, thinking about the bid below which I am not prepared to sell;

[If the valuation in '(a)' is greater than or equal to the valuation in (b) a sale will go through, if not it won't].

(c) I'm a lender, thinking about the price that I could likely achieve in a reasonable amount of time if I have to foreclose;

(d) I'm an estate agent deciding what asking price I should advise a seller to set that will give me a good chance of achieving a sale.


what does your definition mean? who would use it? what for?

Cleaver

the_flying_pig wrote: »

what does your definition mean? who would use it? what for?

Who uses my definition of market price? Pretty much every single market system in the modern world. A buyer and a seller agree a price and this is the market price for that asset at that moment in time. Loughton Monkey has described it very well in his post about Barclay's shares.

I think you're getting tied up in knots with all your a) b) c) points. The market price for an asset is the price agreed for that asset between the buyer and the seller, which is based on a massive range of external factors. You can tell me until you're blue in the face that this is 'worthless' but if you pick pretty much any free market known to man, this is exactly how market prices are set.

Just out of interest, can you name a market where the agreed price beween a buyer and a seller for an asset isn't used as the market price? It the one used for the housing market (albeit via a range of indicies, averages etc.) and it's definately used for all stock markets I can think of.

To try another way, there's a street of 1,000 houses, all pretty much the same. Those houses all sell for around £100,000, give or take a grand or two. I rock up at one of the houses and suddenly offer £130,000 which is accepted. The market price for that house is £130,000. It matters not that everyone else thinks I'm daft, as that's now the price. What will be interesting is when the next house is sold, and then the house after that. If the next few houses are all back to £100,000 then this was just a blip in the market. Now, you can measure this in anyway you like, and I think we'd agree that the perceived value of a house on that street is around £100,000. My purchase will skew the average though. Or you can simply discount it from your data. Or you can be like sibley and say that all houses are now worth £130,000. But these are all just opinions and ways of measuring, which are all subjective. Bottom line is that the market price, for that specific house, at that specific time, was £130,000. That might be a 'worthless' fact for you, but it's still a fact.

the_flying_pig

Cleaver wrote: »

Who uses my definition of market price? Pretty much every single market system in the modern world. A buyer and a seller agree a price and this is the market price for that asset at that moment in time. Loughton Monkey has described it very well in his post about Barclay's shares.

I think you're getting tied up in knots with all your a) b) c) points. The market price for an asset is the price agreed for that asset between the buyer and the seller, which is based on a massive range of external factors. You can tell me until you're blue in the face that this is 'worthless' but if you pick pretty much any free market known to man, this is exactly how market prices are set.

Just out of interest, can you name a market where the agreed price beween a buyer and a seller for an asset isn't used as the market price? It the one used for the housing market (albeit via a range of indicies, averages etc.) and it's definately used for all stock markets I can think of.

To try another way, there's a street of 1,000 houses, all pretty much the same. Those houses all sell for around £100,000, give or take a grand or two. I rock up at one of the houses and suddenly offer £130,000 which is accepted. The market price for that house is £130,000. It matters not that everyone else thinks I'm daft, as that's now the price. What will be interesting is when the next house is sold, and then the house after that. If the next few houses are all back to £100,000 then this was just a blip in the market. Now, you can measure this in anyway you like, and I think we'd agree that the perceived value of a house on that street is around £100,000. My purchase will skew the average though. Or you can simply discount it from your data. Or you can be like sibley and say that all houses are now worth £130,000. But these are all just opinions and ways of measuring, which are all subjective. Bottom line is that the market price, for that specific house, at that specific time, was £130,000. That might be a 'worthless' fact for you, but it's still a fact.

fine but what does your 'market price' mean specifically for property? who uses it? what for? it just sounds like a not-very-meaningful piece of jargon to me.

as a layman I'm more or less familiar with how prices are set in different parts of the economeh.

e.g. the restaurant at the end of my street has a good think about what his competitors are charging [and maybe his costs] and writes a series of 'take it or leave it' offers for would-be customers on a piece of paper.

e.g. in an ebay auction a seller sets a reserve or starting price & bidders compete against each other until a final selling price is reached.

e.g. the price of a consumer good sold in Argos is set in a fairly complex way - there might well be a bit of informal 'retail price maintenance' going on. again prices are very much 'take it or leave it'.

I think I even more or less understand [in rather vague, fuzzy, terms] how surveyors value residential pwoperdee. And I certainly understand how individual selling prices are reached.

you'll see that all of these examples are quite different. i'd be wary about looking for a single expression like 'market price' that's meaningful for all of them.

Cleaver

the_flying_pig wrote: »

fine but what does your 'market price' mean specifically for property? who uses it? what for? it just sounds like a not-very-meaningful piece of jargon to me.

Who uses market price in relation to property? A list would include:

People who buy and sell houses
Banks
Any institution producing an index
Any institution lending money for houses.
Economists
Estate Agents

The list would go on. All of these people and institutions use market price to influence their decisions, reports, lending criteria etc. etc. Many of them will do it by taking a load of market prices and producing averages and reports to help inform their decisions. But this is all reliant on market price.

the_flying_pig wrote: »

as a layman I'm more or less familiar with how prices are set in different parts of the economeh.

e.g. the price of a consumer good sold in Argos is set in a fairly complex way - there might well be a bit of informal 'retail price maintenance' going on. again prices are very much 'take it or leave it'.

you'll see that all of these examples are quite different. i'd be wary about looking for a single expression like 'market price' that's meaningful for all of them.

Well, you can be as wary as you want to be. All economists would argue that there's a very simple way to set a market price, which is the price agreed between a buyer and a seller for an asset. It really is as simple as that.

In your Argos example you're starting to analyse price maintenance, whether customers take or leave a product etc. etc. Which is all very valid when looking at market theory, but not really that important if we're discussing what the simple market price is. The market price is the price agreed between the buyer and the seller for any product in Argos.

the_flying_pig wrote: »

And I certainly understand how individual selling prices are reached.

Are you? I would say that an individual price for a house is reached by the seller and buyer agreeing on a price. This is then the market price for that house. You seem to think it's something different?

Cleaver

the_flying_pig wrote: »

e.g. the restaurant at the end of my street has a good think about what his competitors are charging [and maybe his costs] and writes a series of 'take it or leave it' offers for would-be customers on a piece of paper.

e.g. in an ebay auction a seller sets a reserve or starting price & bidders compete against each other until a final selling price is reached.

e.g. the price of a consumer good sold in Argos is set in a fairly complex way - there might well be a bit of informal 'retail price maintenance' going on. again prices are very much 'take it or leave it'.

And apologies, but just to be pedantic for a second, none of these are examples of the market price. These are examples of a seller assessing what their assets are worth and then advertising them at this price. If a buyer comes in and buys them for this price, then that is indeed a market price. But at the moment, these are just advertised offer figures from the seller (just like a house).

The restaurant in your first example might make a stupid decision to play only thrash metal music and no one wants to go there any more. In which case a buyer, who might be happy for cheaper food whilst listening to Anthrax, might go in and offer 50% off what the restaurant owner is asking due to the music. They then haggle and the correct market price is reached in the end. Someone the next day might go in and not notice the music and pay full price. This is also the correct market price. Both are the 'correct' market price for the two transactions, in that the buyer and seller agreed on the market price for both transactions.

Right, I'm off to watch the FA Cup.