Predicting the future of housing is a science many experts get wrong, probably because they are looking in the wrong direction.
Virtually all of the most common housing market forecasting methods we use rely on the past to predict the future.
These include the property market cycle of endlessly recurring booms and busts, the long term growth notion that housing prices double every eight years or so, the extended no growth theory which claims that an extended period of no growth means that prices are overdue for a rise, or the hot spots idea that recent high growth is a good indicator of more growth to come.
Here’s a story that explains why these methods ultimately fail:
When their chief died, the Indians of a north Canadian tribe chose his scholarly young son to become their new leader.
Although he was studying law at university and knew little of traditional tribal ways, he accepted their offer as an honour and moved up north to live with them.
At first, all went well.
The summer was warm and he went fishing and hunting, enjoying his new found popularity.
But when summer waned, the braves asked their new chief, “What sort of winter will it be?”
He knew nothing of the old ways, how to count the salmon rising in the streams or the number of snow geese flying across the full moon to predict the weather.
He knew only of the internet and iphone, but he did know that winters were colder than summer, so he summoned the tribe and told them “This winter will be cold.”
The braves went out and collected firewood, but as the weeks passed, the weather didn’t worsen.
There was no hint of frost or snow.
The new chief became worried, so he went into his wigwam and secretly rang the weather bureau on his iPhone. “What sort of winter will it be?”
“It will be a very cold winter.”
He confidently informed his braves “This winter will be very cold, indeed.”
So the Indians went off and collected more firewood, but the days stayed warm and nights remained balmy.
There was no sign of winter at all.
He became extremely concerned and rang the bureau again. “Look, you told me that it would be a very cold winter.”
“Yes, yes, it will be a very, very cold winter this year.”
“But how can you be so sure?”
“Easy. It’s because the Indians are collecting lots of firewood.”
Like the weather bureau in this story, it may be comforting and tempting to rely on past performance, because the known is so much easier to deal with than the unknown.
But this can be disastrous.
The conditions which caused price and rent changes in the past are very likely to be different in future because they are determined by movements in household numbers and their composition, the availability and cost of housing finance and whether there’s a shortage or surplus of dwellings as a result.
Changes in prices or rents do not rely on and are not caused by past events.
The mix is always shifting and it is those investors who correctly identify the key trends rather than rely on the past that reap the benefits.
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