Comments on: Why inflated golf club fees point way to economic bust http://www.davidmcwilliams.ie/2001/06/10/why-inflated-golf-club-fees-point-way-to-economic-bust?utm_source=rss&utm_medium=rss&utm_campaign=why-inflated-golf-club-fees-point-way-to-economic-bust The website of economist, author and broadcaster, David McWilliams Thu, 09 Feb 2012 07:42:45 +0000 hourly 1 http://wordpress.org/?v=3.2 By: Brendan Doyle http://www.davidmcwilliams.ie/2001/06/10/why-inflated-golf-club-fees-point-way-to-economic-bust/comment-page-1#comment-16 Brendan Doyle Mon, 06 Oct 2003 00:00:00 +0000 http://311178930#comment-16 It seems to be conventional wisdom that the price at which land (and property in general) trades exceeds its economic value. How does one ascertain the long term economic value of an asset? Conventional financial theory holds that asset prices should be driven by a combination of expected cash returns to be generated by the asset and the level of interest rates used to convert future returns into present value terms. Is property overvalued taking a long term view? The answer given in the article would appear to be yes. If this is so, could the author outline which of the assumptions underlying the current price of property is false? Are future income streams to be below expectations? Interest rates to rise faster than expected? Are there other factors at play? There is no doubt but that the rapid growth in property prices has proved a boon to mainly the older generation. The article however fails to demonstrate that it is a wealth transfer from young to old. It is certainly a cash transfer, but until values fall it can hardly be considered a wealth transfer. People who purchase property are making a lifestyle choice as well as an investment decision. They choose to live in a certain location in a property of a certain size. Cheaper choices are available to them. If there is a bubble in property prices, and if it bursts, the wealth transfer will become horrifically apparent. This article stops short of advising the investor/house buyer how to counteract the wealth transfer effect described. Should a family rent accommodation for a period of time until the bubble bursts? How long will this take? How much of a drop can be expected to occur when it does occur? Alan Greenspan warned of irrational exuberance in the US stock market in 1996. The correction didn't come until 2000. Even by 2003, at the bottom of the market, the Dow Jones Index hadn't fallen to the 1996 level. Does this prove Alan was wrong? Or is the market fundamentally irrational? Property is inherently less volatile than stocks. To a potential house buyer, four year's rent would knock a significant amount off the purchase price of the house, also eliminating a significant part of the interest rate risk. Congratulations on a thought provoking column. These are the thoughts provoked in me. I would welcome feedback on these points. It seems to be conventional wisdom that the price at which
land (and property in general) trades exceeds its economic
value. How does one ascertain the long term economic value
of an asset? Conventional financial theory holds that asset
prices should be driven by a combination of expected cash
returns to be generated by the asset and the level of
interest rates used to convert future returns into present
value terms. Is property overvalued taking a long term
view? The answer given in the article would appear to be
yes. If this is so, could the author outline which of the
assumptions underlying the current price of property is
false? Are future income streams to be below expectations?
Interest rates to rise faster than expected? Are there
other factors at play?

There is no doubt but that the rapid growth in property
prices has proved a boon to mainly the older generation.
The article however fails to demonstrate that it is a
wealth transfer from young to old. It is certainly a cash
transfer, but until values fall it can hardly be considered
a wealth transfer. People who purchase property are making
a lifestyle choice as well as an investment decision. They
choose to live in a certain location in a property of a
certain size. Cheaper choices are available to them.

If there is a bubble in property prices, and if it bursts,
the wealth transfer will become horrifically apparent. This
article stops short of advising the investor/house buyer
how to counteract the wealth transfer effect described.
Should a family rent accommodation for a period of time
until the bubble bursts? How long will this take? How much
of a drop can be expected to occur when it does occur? Alan
Greenspan warned of irrational exuberance in the US stock
market in 1996. The correction didn’t come until 2000. Even
by 2003, at the bottom of the market, the Dow Jones Index
hadn’t fallen to the 1996 level. Does this prove Alan was
wrong? Or is the market fundamentally irrational? Property
is inherently less volatile than stocks. To a potential
house buyer, four year’s rent would knock a significant
amount off the purchase price of the house, also
eliminating a significant part of the interest rate risk.

Congratulations on a thought provoking column. These are
the thoughts provoked in me. I would welcome feedback on
these points.

]]>