One of the members of the joint review group set up by the Institute of Actuaries is Charles Golding of Golding Smith & Partners. It states here that the firm has ‘been providing advice to clients in the equity release market since 2003’. Who better to be on a board of independent experts advising the Institute on the selection of specialist Equity Release advisors?
The Marcus Barnard Show
The Equity Release seminar that Dean and I presented at the London School of Economics on Monday October 1st got a good turnout and prompted a lively, and at times, stormy, discussion.1 The most entertaining contribution to the discussion came from NUMIS equity release analyst Marcus Bernard, who has been pushing Just Group hard as a buy.
Marcus and I are on opposite sides on this issue.
Why the forward price has an interest rate term
Another day, and another challenge to the method we have proposed for the valuation of the no negative equity guarantee. In our presentation here (slide 9, equation 8) we use the term r-q in the calculation of the forward house price at time t, so aren’t we incorporating both a house price growth assumption (r = interest rate) and a net rental rate q? Thus aren’t we – implausibly – assuming that future house price growth will be equal to the interest rate?
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News from nowhere
Ian Mulheirn writes
The price of a property is overwhelmingly determined by the value of the land it sits on, which makes it inherently positional, and not something you can cut to zero. For example, you can’t reduce the value of the land in the City to zero (or even make a material dent in it) by liberalising planning in Surrey. The reason is that the value of the land is determined by the discounted stream of rent you can get from it. This is unrelated to the cost of building. If you build somewhere where nobody wants to live, the discounted stream of rent, and hence the property value, will be zero.
My emphasis. Any offers on that house?
True purpose of pension fund
Kevin writes: ‘I must have been mistaken: the true purpose of a pension fund must be to finance a flutter on the housing market.’
When I first joined the world of insurance, it was explained to me somewhat cynically that banks borrow short term from depositors, and use the money to speculate with. If the bet turns sour and depositors want their money back, it goes horribly wrong very quickly.
Insurance companies, by contrast, borrow long term from future pensioners and use the money to speculate with. If the bet turns sour, it takes about 20 years for things to go horribly wrong, after the prime movers are safely retired (preferably not with a pension for the firm they worked for).
Mulheirn versus Harding
There was a fascinating discussion between Ian Mulheirn and Robin Harding in the letters section of the FT a while ago (August 29 2018). Mulheirn, replying to an article by Harding (‘Planning rules are driving the global housing crisis’, FT August 15 2018), argued that:
The theory and the data clearly indicate that a shortage of homes has not contributed to the 150 per cent rise in UK real prices over the past two decades. Those who reject that conclusion should explain whether it’s the economic theory that’s wrong or the rent data.
The letter is behind a paywall in the comments section, but the substance is broadly as follows.
HBOS: Gone but not forgotten
Today is the 10th anniversary of Lloyds TSB acquiring HBOS. An awful lot has been written about this, but there has been comparatively little about why a regulatory approach that was implemented in early 2008, and which was meant to protect the bank from losing its capital with a probability of 1 in 1,000 years, failed so spectacularly only 9 months later. What went wrong?
Just a minute?
Neil Collins in the FT today.
Just a minute Things are grim at Just Group, provider of annuities for those expecting short lives, but better known for its lifetime mortgages. These allow ageing homeowners to cash in on their property gains with loans where the interest is not paid, but rolls up with the debt. This latter business is relatively new, and pricing the risk that the house will be worth less than the accumulated debt at the homeowner’s death is exercising the Prudential Regulation Authority. It will want more capital from the lenders, and Just has already sacrificed its half-time dividend in anticipation, warning of a capital raise to follow. The shares have halved in four months, and at 74p are discounting a thumping rights issue to appease the PRA. Only then can the market price the risk that the mortgaged property will fetch less in 20 years’ time than its value today. It does not seem remotely likely. At this price, Just shares are discounting housing Armageddon.
Deferment Price Less Than Spot Price? What Else Could It Be?
In a recent posting Guy Thomas takes issue with my new friends at the Prudential Regulation Authority on Consultation Paper CP13/18 which deal with the valuation of the no-negative-equity guarantees (NNEGs) in equity release mortgages. Dean has responded to Guy here, but I would like to stick my own oar in the water too, particularly on the issue of whether the deferment price on a property should be less than the current price.
Continue reading “Deferment Price Less Than Spot Price? What Else Could It Be?”
UnBuffetted
A postbag objector objects to my post on Monday, saying that Warren Buffett explicitly disagrees with quarterly P/L swings on derivative positions, given that they are based on B-S valuations. See e.g. his 2010 newsletter p.21. Given that Buffett is taking in billions of premium without collateral, which he can then invest however he likes, why should this strategy be equivalent to taking a long position, even on no-collateral terms, when the latter would have produced nothing up front?