Houses only 12.5% overvalued at the peak !

The ESRI says that it has revised its forecast for house price changes in 2008 and 2009 downwards to -6.3 per cent and -1.5 per cent respectively. These forecasts are based on long-run estimates from its equation for housing demand. This equation uses its forecast numbers for income, house building, population and real interest rates to forecast the implied equilibrium house price level. The most recent estimation results, shown in Figure 5, suggest that, relative to economic fundamentals, house prices were overvalued by over 12.5 per cent in 2007. Based on the forecast house price numbers this gap closes to 0.9 per cent in 2008 and 2009. These forecasts assume an orderly correction in the market, however, prices may well overshoot on their return to equilibrium, in which case house prices could well fall further over the short term. … 3994.shtml

If one was to believe that graph, house prices became overvalued sometime around 2004 - that seems rather hard to believe - and are now close to fairly valued - again, rather hard to believe.

When these geniuseses are looking at ‘da fundamentals’ - do they ever bother to access how sustainable said fundamentals are?

I somehow doubt they were saying back in 2006/2007 that house prices were overvalued. Its easy for anyone to look back now and acknowledge that with hindsight.
They say it now because house prices have already corrected 10%+, so it adds to their current credibility and makes the public feel ‘warm’ inside knowing that there is a highly predictive model at ESRI which suggests we are now near the low in house prices.

In any case, all these models are rubbish, throw enough data into a computer and it will ‘solve’ for some nice looking model which has the ability to closely track the past. Sadly, they often rarely track the future…
Also, I bet if u put in the new mortgage rates of 6%+ that the banks are adjusting too, the lack of the 100% mortgage, and the implied ECB hikes on top of that, a similar model would predict something very scary :open_mouth:

That claim doesn’t really pass any sniff tests. I think I can guess what actually is going on there, but something to bear in mind. The following factors are not things that would be expected to have any bearing on the long term market clearing price for housing and hence any measure of under/over valuation:

  • population
  • real interest rates
  • house building

There’s yer problem mate. Real interest rates. Inflation 4%, borrowing costs 5/6%, model suggests cost of ownership 1/2% pa. Not in the real world. Never heard someone say “my mortgage has doubled but thats fine as the real cost of ownership is only 1/2%”.

Dumb dismal science.