Property investors are always looking for the causes of house price growth.
The reason is obvious – if we know what leads to price rises, we can find potential boom areas before the growth starts.
One well-tested way to do this is to find links between cause and effect, which is a process called correlation.
However, some correlations can actually be results, not causes, and linking them will totally mislead us.
For example, there is a strong correlation in Australia between the amount of ice cream which is eaten each month and the number of accidental drownings that occur, as this example demonstrates.
Based on the evidence, you might conclude that there is a link between ice cream sales and drownings and that eating ice cream somehow causes drowning accidents.
The real reason, of course, is that more ice cream is consumed in the hotter months of the year which also happens to be when people take to the water.
So hot weather is the cause and ice cream eating and drownings are the results.
The search for causes of housing price changes is similar.
We may read that higher incomes, infrastructure, gentrification and urban renewal lead to house price growth, while a rise in distressed sales, leads to falling prices.
But these could be effects, like ice cream and drownings are, with a different cause altogether.
For example, gentrification, urban renewal and rising prices are the results of increased demand for inner urban living, while a rise in stressed sales and falling prices are the effects of less buyer demand.
Rising or falling prices are always the results of changes in the key dynamics of housing markets, which are population movement, purchasing power and whether there’s a shortage or surplus of available properties.
So if you want to know where prices are likely to rise or fall, look for changes in those dynamics.
