We shall be publishing a near complete transcript of the 28 February Staple Inn ERM presentation shortly. Meanwhile, here is Malcolm Kemp on the (to us strange)1 idea that we divide the net rental yield by 5 in order to get the deferment rate used for the Tunaru model.
Video is out
The video of the 28 February Staple Inn discussion on the No Negative Equity Guarantee is here.
I am sure we will be commenting later.
Now there are three
Dean Buckner and Kevin Dowd, 1 March 2019
Professor Tunaru opens his NNEG report with an oft-cited quote from George Box: “All models are wrong but some are useful.” The Box aphorism is an apt one, but Professor Box went on to state
Since all models are wrong the scientist must be alert to what is importantly wrong. It is inappropriate to be concerned about mice when there are tigers abroad. (Box, 1976, p. 792)
For us the most interesting of the terms of reference in the ABI-IFoA aka astrology project on NNEG valuation was (to quote the project’s request for tender) to “consider whether there are any “halfway house” solutions between real world and risk-neutral approaches … .”
Houses as an investment asset
Tunaru writes (p.30):
… it can be argued that the buyer of a house is not the equivalent to an investor buying a house as an investment asset. For the majority of buyers, houses play the role of a consumption asset and not that of an investment asset. There is no evidence that rental yields are driving future house prices so the expected house prices at various future long horizons cannot be determined with growth models in the same way expected share prices may be determined with growth models linked to dividends.
Questions for tonight
As most of our readers already known there is an event tonight at Staple Inn Hall to deliver the results of Professor Tunaru’s research project on Equity Release Mortgages.
Kevin and Dean won’t be able to attend. However we have published Part I and Part II of our own commentary on the research paper. In addition, for anyone attending who would like to ask, here are the questions we would like to have asked, if we had been able to attend.
Vol^2
Dean Buckner and Kevin Dowd 27 February 2019
Professor Radu Tunaru’s new report on NNEG valuation is attracting a lot of discussion and rightly so. Its key result – that the net rental yield used in NNEG valuation should be 20% of the observed yield because only 20% of properties are rented out – was discussed in our blog posting on Monday.
Today we address a second issue, his assumptions about volatility.
Tunaru Fails to Deliver Credible Half-Way House
By Dean Buckner and Kevin Dowd, 25 February 2019
Tunaru’s half-way house between ‘real world’ and ‘market consistent’ approaches does not work and the ‘real-world’ NNEG valuation approach remains indefensible.
Continue reading “Tunaru Fails to Deliver Credible Half-Way House”
No perspective from which it makes sense
We are still poring over the infamous paper published by the Institute on Friday, and hope to be back on air by mid week. Meanwhile, our chum Andrew Smith, the internationally renowned actuary now teaching at UCD, popped something in the post.
He is equally perplexed by the paper’s argument that since only 20% of the market is rented, therefore the rental yield on the market as a whole is a fifth of the yield on rented properties. ‘I can’t see any perspective from which this makes sense’. Quite.
Another of our friends was more blunt. ‘I hadn’t realised that the bank account that gives me 1% was actually only 0.001% because only 4000 people have that account’.
I am sure it will become clear in the end.
Just out
The ABI-IFoA-Tunaru paper was published this morning. It is 90 pages and fairly mathematically complex and we will be commenting next week.
There is some rather strange stuff on p.33 that defies comprehension so far, hopefully the weekend will make a difference. Comments (via our contact page) gratefully received as ever.
Have a good weekend.
From the postbag
‘Concerned Observer’, writes in to query my recent post on the buyout model. He or she makes two points. First:
… the buy-in premium tends to be lower than the present value of the liabilities using a gilts-based discount rate. So there will be some schemes that are not sufficiently well funded to be able to invest in gilts and still meet the liabilities as they fall due, but which can afford a buy-in.