I agree with this approach we use a similar method,
however all the XXXXs are not heplful.

The actual numbers could have been used

The xxx in the article are pointless. Also, the press here in the Czech Republic have a different view of the economic situation here.
However, in my opinion as a resident here, new builds will slow down dramatically, leading to good opportunities for investors to obtain deals. The mortgage market is standing up here.
Once the deals have been snapped up there is then likely, again in my opinion, to be a shortage of new builds due to the slowdown in new development- leading to an upturn in demand.

I am also agree. I am new here and looking for earning method. I am planning to invest my money in real estate bcoz this is the best time for investment in this field but not sure is it worth or not.

For a long-term investor - not a short-term speculator - the fundamental or Intrinsic Property Value is the only factor that should influence a decision to buy.

Fundamental Intrinsic Property Values are surely determined by comparing the current yield against the historical. Current price is therefore entirely applicable to determining the value.

It is all very well having growing employment, lending, population, income and falling supply but if you buy at a price in which the yield is below the long term average the future capital growth will be negligable despite these 'secondary' positive fundamentals.

Yield is everything. Buffet wouldn't buy property at the type of yields available around the world in 2007 (i.e. between 3%-5%) when his costs to service the loan were far higher or he could get a better Return on Capital elsewhere.

Even growth countries (i.e. CEE) with these 'instrinsic' fundamentals are good but with low yields are now showing a reversion to the mean yield.

Yes these positive fundamentals will probably mean that a large undershooting of the average long term property yield will unlikley happen in CEE markets but having a good PS 'intrinsic value' does not in itself justify a good long term property.

The price you pay is the main driver of instrinsic value when compared against the long term historical yield. How can a CEE property at 4% yield have future capital growth? Will yields become the lowest ever see in the world at 2-3%???

The typical long term yield on property is around 7-9% (Read Bubbles and How to Survive Them by John Calverley).

This level determines intrinsic value. Anything with a higher yield good long term value as there is 'potential' for future growth (i.e. the margin of safety that Buffet talks of).

Anything lower than the long term historical yield represents a poor value investment despite the other fundamentals that represent secondary determining factors to buy.

On the basis of long term yield the UK and other western markets have a long way to fall to meet fair value or 'intrinsic value'. Likewise there a few if any developing/emerging markets with high enough yields at present to justify an investment into them.

Great post Tom. I'd be interested to hear hpw highly PS weight the yield argument to their IV variables.

Mark

Yield is hardly ever mentioned on here.

It was almost as if low yields were fine and capital growth would still ensue, which we now realise is an impossibility!

Yields globally have a long way to go to reach fair value and many markets will undershoot by a long way.

Property is due a lengthy reversion to the mean.

Check out the graph on this link titled 'A History of Home Values'. It is US based but reflects property prices without accounting for inflation. Prices always revert to the mean 100 value.

http: / /www .marketoracle .co .uk /Article8541 .html

Look at the rise over from 2000-2006! The largest property bubble in 110 years! The reversion to the mean is only 1/2 way through. US property has much further to fall to reach fair value.

Anyone betting the UK and most other property markets arent heading the same way??? Down and for many years....

Tom,

Agree with your comments but would add the following point: investment performance is always relative. In our current environment of very low and/or uncertain yields/returns in other asset classes (cash, bonds, stocks), there is a case to be made that real estate investments in areas having comparatively stronger market fundamentals will likely provide better relative returns over the next 5 years..barring exchange rate risk.

A key factor for UK investors these days is the pound exchange rate. history tells us that forex rates tend to overshoot/undershoot. There is a reasonable case to be made that over the long term GBP is today undervalued vs many currencies except perhaps a few CEE (Romania, Bulgaria, Latvia) - this could be a significant risk for people looking to invest currently.

R

In our current environment of very low and/or uncertain yields/returns in other asset classes (cash, bonds, stocks)

Disagree.

Some Government's are issuing bonds at 13% (i.e. Brazil).

EU bonds are comparable to the yield you will get on a property and have far less risk (although not no risk!).

Corporate bonds are available up to 10%. Likewise the dividend yield on FTSE 100 cash generating shares go up to 10%.

Fair points but as mentionned before it's all about return vs risk

Brazil: an interesting currency bet. The reason it's at 13% percent is the perceived default risk (ie very high)..and as we all know: sovereign defaults in South America = very limited recovery.

EU bonds: need to lock in 10-15 years to reach a 4% yield but with total return risk if interest increase during this time...and almost no upside (unless one thinks interest rates will further decrease).

Corporate bonds: default risk priced in the seemingly attractive yield . Total return will probably be less for many

Shares: make the wrong bet and equity can get wiped down to zero and never recover...as we all know this rarely happens in property

And the downside risk in property = very high.

Upside potential in property = very low.