Goldman Sachs: UK houses "undervalued"

HAMISH_MCTAVISH

-UK house prices currently 'undervalued'

-Significant price upside in the years ahead

-Chronic shortage of houses to blame, not speculative behaviour or a bubble

-UK had "a bust without a boom"

http://bcove.me/s90futt0

Graham_Devon

Heres a conundrum. If, as you say, they cannot be overvalued.....how can they be undervalued?

HAMISH_MCTAVISH

Graham_Devon wrote: »

Heres a conundrum. If, as you say, they cannot be overvalued.....how can they be undervalued?

The Goldman Sachs economist explains it quite clearly at the link.;)

wotsthat

Doesn't it make a difference when someone is given the opportunity to put their case forward in a clear, rational manner? It would be interesting to see Martin (rentaguest) Sorrel turn up with his one graph showing that last year (in London only) HPI was above inflation for the first time in years and concluding 'it's a bubble'.

However, the chap from Goldman Sachs didn't get any applause and, like the great unwashed, that's how I determine if someone is correct or not.

the_flying_pig

He's Irish, always worth listening when those sharp types tell you anything about house prices.

I think that it's a bit of a stretch to describe this as an official Goldman view, if there is such a thing. There's definitely an element of whimsy, tongue-in-cheekedness about the whole interview.

He's saying 'yeah, they're overvalued based on price to income, but only about normal based on price to rent... based on low building we think it will in future go abnormally high on both measures rather than just the one'.

That's a bit lame. Saying that he thinks housing should be overvalued on two measures, concluding, based on it only being overvalued on one out of two, that it's undervalued.

Jason74

Thaks for this Hamish. The article represents an interesting counter view, and is very well put. I think a few points stand out for me though.

1) He talks about a "bust without a boom", but he is actually referring to new housing starts, rather than prices. In the sense that he's talking about it, he is of course correct, but using the "bust without a boom" headline to support the "undersvalued" view is a little bit cheeky, as of course most people will think of prices when people talk about "boom and bust"

2) "not driven by speculative behaviour". I really can't agree with this. Now I need to say here I'm talking about London in particular, but there can be no doubt that speculative behaviour is a key par of what is going on in the capital. When people buy houses purely as a way of parking their money, this clearly is speculative behaviour. And even if that is only going on in small areas, there can be no doubt that this is having a major impact on London house prices as a whole. I would also argue that he "high rent" issue is also in part a function of speculation as much as the supply / demand issue (albeit all the speculation in the world wont raise prices without that supply and demand imbalance).

3) His argument is to an extent based on a world of 0.5% interest rates. Indeed, he states that low interest rates are "at the heart" of his argument. While rates are likely to remain relatively low for some time, they're not going to remain this low for ever.

The big thing for me though, was the fact that the time when we built most, was when there was direct public sector investment in housebuilding. The one thing that is clear to me, is that we have a major problem in terms of how our housing market works, and if this piece is correct, that problem is only going to get worse. Imho, "the market" doesn't have the solution to these problems, and some kind of direct public sector intervention will be needed if they are going to be resolved.

CLAPTON

Jason74 wrote: »

The big thing for me though, was the fact that the time when we built most, was when there was direct public sector investment in housebuilding. The one thing that is clear to me, is that we have a major problem in terms of how our housing market works, and if this piece is correct, that problem is only going to get worse. Imho, "the market" doesn't have the solution to these problems, and some kind of direct public sector intervention will be needed if they are going to be resolved.

when we build the 'most', the government wasn't restricting planning permission nor was it adding extra costs and limitations on private sector builders.
indeed the government was doing the exact reverse, compulsory purchase, government money clearing land etc

truely with the government meddling as it does now, there will continue to be a avoidable housing shortage and a general drift to higher prices.

dryhat

With $700 trillion of worthless derivatives sloshing around, Goldman Sachs and the other big banks NEED every house in UK to be valued at about £25million in order for their books to balance.

Without government support they would be bankrupt and I won't be taking anything they say seriously.

mystic_trev

I should imagine most things are undervalued for Goldman Sachs staff!;)

Generali

dryhat wrote: »

With $700 trillion of worthless derivatives sloshing around, Goldman Sachs and the other big banks NEED every house in UK to be valued at about £25million in order for their books to balance.

Without government support they would be bankrupt and I won't be taking anything they say seriously.

1. Notional value not margin price
2. They're not all worthless, not by any means. Is an FX hedge worthless?

purch

Generali wrote: »

Is an FX hedge worthless?

Can't be.

A Hedge by it's very existence, and it's very purpose can never be worthless.