Property investors can easily become confused with so many experts and talking heads providing widely different views of the housing market and its likely direction.
Today I’d like to explain how to sort the wheat from the chaff.
There’s a huge amount of misinformation floating around in the housing market, largely because the provision of property investment information and its support services are unregulated.
This is why the very first step you should take when offered information about the housing market from a so-called ‘expert’ is to check their bona fides.
It’s easy to do this – just google their name and check their credentials.
- What published housing market books or articles have they written?
- What media statements they have made about the housing market?
- How accurate (or not) have they turned out to be or
- Are they actually wolves in sheep’s clothing, pretending to be on your side but in reality receiving kickbacks, commissions, finder’s fees or some other financial incentive to push you down a certain property direction?
Check past accuracy, not just the claims
If you are planning to make use of predictive information provided in any report or subscription service, or by any expert, always check how accurate the report provider has been in the past – not just from a few anecdotal ‘success stories’, but on genuine evidence based on the actual performance of their reports.
Any predictive report should explain the methodology on which the prediction is made; whether the methodology has been independently tested and proven to be reliable and how effective it has been in the past.
This is essential because it will enable you to identify misinformation based on hearsay or ignorance of how the housing market actually works.
Much so-called evidence is really only ‘gossip’
Hearsay or anecdotal evidence is often used in reports, stories and advertisements about the housing market to justify the attractiveness of some suburbs or towns for investors.
If you hear or see statements such as ‘These are selling like crazy’ or ‘This market is hot’, claims that someone bought in the area and doubled their money in a few years or ‘Be quick or you’ll miss out.’ – that’s hearsay or gossip.
It may well be true, but it bears absolutely no relationship to the future performance of the area for investors.
The only reason to buy in a suburb is if the genuine demand for housing is about to rise.
Even new infrastructure projects such as mines or railway lines can only have a speculative impact on housing markets until they are complete, and can only then have a positive impact on housing prices or rents.
Information based on ignorance is dangerous
Ignorance is responsible for some of the most dangerous advice you are every likely to receive and it may occasionally even come from people who you would think should know better, such as mentors, motivators, developers, property marketers and real estate agents.
The information is usually couched in terms of a suburb’s past performance and also invokes the property market cycle or property clock in some mysterious way, such as:
‘This suburb has enjoyed 8% capital growth per year over a 10 year cycle’ or ‘Suburbs which have gone through a downturn may be about to bounce back’ or ‘Always invest in areas at the bottom of the property clock’.
When you see such statements, remember that past performance is no indicator of future performance where the housing market is concerned.
This is because the conditions which caused price and rent changes in the past are very likely to be different in future.
There are only a few key dynamics which dictate changes in housing prices and rents and these apply equally to cities, regions or individual suburbs.
These key dynamics are population growth and change, the availability, cost of and need for finance and the relative surplus or shortage of suitable housing stock.
Even when the rate of population growth and availability of finance are identical to some previous point in time, the impact on housing prices or rents will be completely different next time around if the housing stock situation is also dissimilar to what it was before.
Relying on past performance is like driving your car by looking through the rear view mirror.
All you can see is where you’ve been and that won’t help you to know where you’re going.