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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”

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“How scam values on equity release loans affect leaseholders”

An article of mine has just been published by Leasehold Knowledge Partnership, which campaigns for a better deal for leaseholders. The introduction is by Seb O’Kelly, in his inimitable style (he used to be a journalist at the Daily Mail). The point of the article is that the deferment rate used to value equity release mortgages is the same as the rate which would in theory be used to value a leasehold extension. Lower rates favour landlords, higher rates favour leaseholders. The PRA seems not to have spotted the connection between the two political issues. In coming in with an apparently unevidenced 2%, they are imposing a valuation model that affects the interests of a whole bunch of people that they haven’t so far consulted. Now is the time. If you think you may be affected, write to the CP (CP13_18@bankofengland.co.uk), asking for the PRA to make its thinking clearer, and for a place at the table, if you wish.

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A house of many mansions

Eumaeus is dedicated to keeping an eye on the house, but this house has many dwelling places. Kevin Dowd’s ‘Asleep at the Wheel’ took the PRA to task for having dozed off a bit while deciding on how to price a put option, but there are also other regulatory or standard-setting bodies who are directly or indirectly responsible for valuing financial instruments correctly.

The exam question is, given the number of such bodies, why has none of them identified or addressed the problem that some firms apparently cannot value an elementary put option1 correctly?

Continue reading “A house of many mansions”

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A Tender Issue

Kevin Dowd  20 August 2018

Mars in Capricorn

Earlier this week the Association of British Insurers and the Institute and Faculty of Actuaries issued a tender call for research on the valuation of the No-Negative Equity Guarantees (NNEGs) in Equity Release Mortgages (ERMs). Their timing is perfect, coming as it does a week after my report on NNEG valuation, Asleep at the Wheel: The Prudential Regulation Authority and the Equity Release Sector, and a few weeks after the PRA’s most recent Consultation Paper on the subject, CP 13/18, “Solvency II: Equity Release Mortgages.” One thing is for sure: the current manual used by practising actuaries for the valuation of NNEGs is not so much out of date as flat out wrong.

Continue reading “A Tender Issue”

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From the postbag

A reader writes questioning my claim in the 7 August BBC interview that Matching Adjustment is fake equity. Compare a gilt and a perpetuity issued by an insurance company, he says. Assume the gilt is highly liquid and can be sold in the secondary market, but the perpetuity is not. Then if the two instruments are priced the same, shouldn’t I choose the gilt every time? And doesn’t this, by implication, suggest that they cannot have the same value?
Continue reading “From the postbag”

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What Happens If My Equity Release Provider Goes Bust?

Kevin Dowd 16 August 2018

Adam Williams had an interesting article on this issue in the Daily Telegraph (14 August 2018) .

It’s a good question.

Let me quote from his article and add some comments:

‘What happens if my equity release provider goes bust? (Adam Williams, 14 Aug 2018) … ‘your fears are not unfounded. A report issued by the Adam Smith Institute, a free market pressure group, said the equity release market could be sent into meltdown if house prices were to fall substantially in future’.

Continue reading “What Happens If My Equity Release Provider Goes Bust?”

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No comprende

The spate of publicity surrounding ‘Asleep at the Wheel’ unleashed a torrent of nonsense into the printed media and the internet. It will take some time to unravel this, although Kevin has already posted on the subject. See here, on Baroness Altmann’s mistaken idea that he was publishing a risk-model, rather than a valuation model, and here, on the Equity Release Council’s misconception that ‘price trends’ are in any way relevant for pricing or valuing the NNEG.
Continue reading “No comprende”

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Baroness Altmann Rather Too Quick to Dismiss Dowd Report on Equity Release

Kevin Dowd 14 August 2018

Harvey Jones had an article in the 12 August Sunday Express on my Equity Release report, Asleep at the Wheel: The Prudential Regulation Authority and the Equity Release Sector, which was published last week by the Adam Smith Institute.

The article included some comments on the report from a number of experts, including Baroness Ros Altmann, David Cameron’s former Pensions Minister.

“I never read a book I must review; it prejudices you so,” said Oscar Wilde. If she has read the report, I see no evidence of it in her comments.

Continue reading “Baroness Altmann Rather Too Quick to Dismiss Dowd Report on Equity Release”