Dear Reader,
This will be a four part series of fundamental analysis and valuation of the housing market.
Part 1: I will explore whether or not a housing bubble exists by estimating the intrinsic value of real estate and comparing it to the price.Β
Part 2: I will look at how large the bubble is, pontificate on how the bubble formed, and attempt to explain why it exists.
Part 3: I will illustrate the similarities between the housing market and the economics of a Ponzi scheme.
Part 4: I will look at whether or not the bubble will burst and what that might look like.
Although I valued residential real estate markets in 108 of the largest economies in the world, and found comparable results, I will focus my discussion on the UK.
Part 1: Is there a housing bubble?
As I established in a primer on valuation fundamentals, the intrinsic value of any financial asset is the discounted value of all expected future free-cash flows. For real estate, these cash-flows are proportional to all the rental incomβ¦