What is the correct price of residential property?

1. Introduction

This work tends to give a quantitative measure for estimating the fair price for each base of residential property. We will use the following three methods of assessment in estimating the price and we demonstrate the inaccuracy of the two of them and to refine the measure of right.

2. The estimation method is the right one?

Since we are currently aware, there are several methods used to estimate the price of the property, but I will speakonly three of them:

- The market price, with a drag on the correct
- The price is formed on the tax debt to be paid when the deal has to be managed
- The prediction of future cash flows from the property, the property must be rented

The first method (market price adjusted by a factor slowing down) is used by banks, but it is misleading and has led to many difficulties in the restructuring of mortgage loans has. Many of the public believe that theThe markets are in balance or tend to be in balance. This is a false premise. The markets are not balanced and do not necessarily converge to equilibrium. Of course we understand the reasons for these discrepancies are the market, a clearer picture of market forces and indicators to determine each market. Bellow describes the factors that keep the markets out of balance in general:

- A large expansion of credit

A credit is generally largeExpansion in each country should be constantly reviewed and evaluated as a possible indicator of future financial matters. We need to separate the private external debt foreign debt of the government. If the increase in private external debt (a phenomenon known as "credit expansion" is known) is the fundamental rule of "quantitative easing", for example, access to many traders because of loose monetary conditions and low-interest loans. This usually results in artificially highThe demand for most goods at higher prices of these goods. It also leads to bad investments and market imbalance.

- A major expansion of government

When a government is an extension on its foreign debt, it does basically the same as the other actors in times of quantitative easing. Some argue that when it comes to strategic projects, an external public debt can be a good thing, but growing foreign debt in the hands of politicians who normally think in four lefthorizon of a virtual anomaly.

- Misunderstanding People of the world economic

In general, the common people, they tend to behave rationally in the short term, but investment decisions for the most evil in the long run, if only we have.

This also applies to the housing market - not knowing the right price in the domestic market, people are considering buying a house, a good "investment" is.

- Barriers to entry, monopoly and oligopoly

with various barriersEntry, and monopoly in the markets has gone out of balance.

The second evaluation method is based on the premise that the price based on the tax liability paid if the case has much need to be trained. This is not true because the taxes are usually avoided by all, and the price is formed in this way unsustainable. It could be below or above the fair price for only the desire to minimize taxes are based.

3. The price is a net present value of expected futurePayments

The third method, which I would agree with much, and I prove that it works with small fixes - is to determine the appropriate price based on future cash flows generated by a house or apartment:

If we use the following formula:

Pn = 0 + a ^ 2 + a0q a0q +....+ a0q ^ n = a0 * (1-q ^ n) / (1-q)
where a0 - rent paid over the years
q = 1 / (1 + i) - the discount rate, so that all future payments received in cash value
i - discount rate
Pn - Netpresent value of all future rents, discounted at the discount rate

When n tends to infinity, then we have:

Pn = a0 * (1 + i) s

Rather like the price of the bond and is not far from it.

These deductions are:

If the discount rate rises, house price falls
If we are going to collect the rents, the price drops

Now we take as the discount rate, the average annual rate of interest at which banks are lending mortgage products.In addition, we examine how much money we can do every year we have to rent a house or an apartment, and we are ready, the fair price today must be calculated.

4. Case study

Example 1: In Bulgaria, 12.2009 for an apartment of 40 square meters near the center of Sofia, the rent is 210 euros per month, for example, € 2,520 per year. The annual interest rate on a mortgage in Bulgaria is about 8.5%.

So the fair price of the house should now be = 2520 * (1 +0.085) / 0.0085 = 32 167 EUR, whichmore than 804 euros per square meter, which is not far from the market price.

Example 2: In Germany, 12.2009 for an apartment of 38.5 square meters near the center of Nuremberg, the rent is 250 € a month, say, 3000 € per year. The annual interest rate on a mortgage in Germany about 6%.

So the fair price of the house should now be 3000 * (1 +0.06) / 0.06 = 53 000. The apartment is on sale and the price of EUR 35 000.

Comparing the two cases shows that in Bulgaria, with a viewhigher country risk, higher interest rates and lower purchasing power and lower rents, it is better not to invest because the market prices are still above or near the right price, but rents tend to decrease as well .

On the contrary, we see great potential in Germany, where the fair price of the house is positively influenced by two main factors - lower interest rates on loans and higher income for the holidays.

5. Summary

We have, in fact, the two most commonly quantifiedAsked by investors in real estate - how much should I pay for a house and what happens if I take out a loan to finance the purchase and then rent the house ("buy to let").

We usually have a clear link between the fair price of a house or an apartment and two other markets - the credit markets and the rental market. We have also argued that the price of work primarily by the interest rate at which banks and customers are ready and the rental income could be headed this propertyaccumulate over the years. We also explained why not, as a rule all markets are in equilibrium and as a good investor can estimate the right price and take measures to accumulate more wealth.

6. Literature

1. "The new paradigm for financial markets, the credit crisis of 2008 and what it means" - George Soros
2. "Crash Proof How to profit from the economic crisis" - Peter Schiff
3. "Daddy daddy rich and poor" - Robert Kiyosaki
4. "Theory of dynamic budget" - EugeneSchmalenbach