Author: db

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When in doubt

As discussed in yesterday’s post, the Just Group auditors stated that the final outcome of CP 13/18 could have a materially negative effect on the regulatory capital position and financial condition etc. of the Group, and constitute a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern. You might have thought that was clear enough, but lest you should have been misled, Rodney Cook (Group CEO) clarified matters at a presentation. [1:11:00]

“Let me just cover off the word ‘doubt’, that is an auditing and accounting and statutory set of words, and that is why it is in there.”

That makes sense. ‘Material uncertainty’, ‘significant doubt’, ‘going concern’ etc do not have their usual English meaning, but are merely accounting and auditing technical terms, signifying nothing in particular as Mr. Cook notes.

Continue reading “When in doubt”

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How efficient is the efficient market?

My work with Kevin Dowd on the pricing of equity release mortgages has been illuminating. It has been an interesting pricing question for us geeks, of course, but also interesting was the insight into how efficiently the market acquires information that is public domain, or which can be acquired from public domain information ‘by persons exercising diligence or expertise’, as the 1993 Criminal Justice Act puts it. My impression from our recent work on pricing is that the market isn’t very efficient at all.

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Omnis Phoenix est

Kevin writes (28 August 2018)

A less extreme case is where the property is uninhabitable and repair would be uneconomic, but the land itself is valuable. Parts of Detroit come to mind as Dean has suggested here. You could then say that the net rental proceeds were negative for the current property, but this situation would not last. In this case, the property would be sold off and demolished, and the site redeveloped. A positive rental stream would then eventually be restored.

True, and the picture above (Charleston St, Detroit) illustrates this nicely. Many of the derelict streets in Detroit still look like the picture on the left. Houses abandoned or burned out, gardens reverting to the wild. But some parts have regenerated, getting new life by arising from the ashes of the old life, like the Phoenix. See the right hand part of the street in 2013.

The new houses will sell for a price greater than zero.

 

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Letter to the Guv’nor

Is the Bank of England pandering to freeholders over punitive lease valuations? Read all about it here, by Leasehold Knowledge, who have spotted the connection between the deferment rate consultation by the PRA, and the issue of leaseholder exploitation by large vested interests. A copy of their letter to the Guv’nor, and a nice picture of Kevin too.

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Just in spotlight

Oliver Ralph of the FT has a piece ‘just’ out, on fears about the impact of proposed new PRA rules on Just Group’s capital base.

The PRA’s consultation paper suggested tougher treatment for these type of mortgages, to take account of the risk created by the no negative equity guarantees.

That’s not quite right, as we have pointed out here and elsewhere. The PRA’s consultation paper CP 13/18 (02 July 2018) is not about the risk of such mortgages, i.e. capital requirements, which  the PRA has so far been silent about, but rather their valuation, which impacts capital available or ‘capital resources’ as the regulator calls it.
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Population and housing prices

Source: Federal Reserve, St Louis; US census bureau

It is a truth universally acknowledged that the currently high price of housing in the UK, indeed most of the developed world, is due to housing shortage. The graph above shows (1) house prices in Phoenix and Detroit, 1991-2017, and (2) Detroit population 1820-2017. Beware of the differences in time scales.

It is clear that there is a similar pattern in the Detroit and Phoenix prices. They grow a lot in the noughties, peaking around early 2007. Then they collapse a lot, reaching a trough 2009-2012. Then they head back up again. You can see the same pattern across the US and in the UK (but not in Vancouver and Auckland, where they didn’t stop in 2007 and just kept heading up).

The rule of ‘same effect, same cause’ doesn’t always hold, but there is a suspicion that there is a single phenomenon underlying this. What could it be?

Well it can’t be housing shortage, at least in Detroit. Its population shows a consistent decline from its peak in the 1950s. Everyone has seen those pictures of whole areas that have reverted to countryside, because no one wants to live there. Clearly there is no housing shortage in Detroit. We could make a cautious inference that whatever common cause explains the upward and downward swings in prices is unconnected with population.

The population growth of Phoenix (not shown) since the 1950s has however been massive. One theory explains this by air conditioning. Detroit is a cold and miserable place in the winter. Phoenix is nice and sunny, and it doesn’t matter it is a bit of a furnace if you have AC.  That I mention the theory does not indicate agreement.

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Complete nonsense


Thank you to all our friends who mailed us pointing out this strange request in the Institute’s call for tender.

4.2.5 Confidentiality

You agree to keep confidential this Request and all information provided therein. The information provided may be made available to your employees and professional advisers directly involved in tendering to the IFoA and ABI (who must also be made aware of the obligation of confidentiality) but shall not be copied, reproduced, distributed or otherwise made available to any other party in any circumstances without the prior written consent of the IFoA and ABI, nor may it be used for any other purpose other than that for which it is intended.

Interesting philosophical issue: how can I agree to keep confidential any information that the body insisting on confidentiality itself puts on the internet? Kevin and I scratched our noses for a while then Kevin thought perhaps it meant this

We might just feel the need to provide you with further information that we would prefer did not become public because we have already endorsed enough nonsense as it is and we would not wish to become a laughing stock.

No we wouldn’t want that. Way to go, Institute of Actuaries!

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ONE MORE TIME


Following the publication of Asleep at the Wheel and the launch of this blog Kevin and I have received a steady stream of mail objecting to our claims (and the claims of the PRA) about the valuation of the no negative equity guarantee. There is one idea that dominates, namely that asset growth assumptions should in some way affect the value of a deferment or forward contract, contrary to what we claim. Don’t Kevin and I invest in UK property? Is UK property as a valid asset to hold in a diversified portfolio as an investor? Etc etc.

Now I have already addressed this fallacy in an earlier post. But let’s go through it ‘one more time’, hopefully for the last time.

Continue reading “ONE MORE TIME”