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By John Lindeman

The false correlation curse

Property investors are always on the lookout for the causes of house price growth.

The reason is obvious – if we know what leads to price rises, we can identify potential boom areas before the growth starts and then sell out before it stops. Property Investment

One well-tested way to do this is to find links between cause and effect, which is a process called correlation.

Correlations occur when different events lead to the same result.

However, when we find such correlations and use them to predict housing market behaviour, we need to be sure that one event is actually causing the other.

Similarities of behaviour can often be accidental, or there might be another cause altogether.

For example, did you know that there is a strong correlation between the amount of ice cream which is eaten each month and the number of accidental drownings that occur?

This is shown in the following chart.

The false correlation curse

Based on this evidence, governments might decide that ice cream eating somehow causes more drowning accidents and ban ice cream from beaches and waterways in an effort to reduce the number of deaths by drowning.

This would of course have no effect except to annoy ice cream eaters because both ice cream eating and drowning accidents are the results of warmer weather - not the causes.

So, when you read claims predicting housing market booms based on gentrification, new shopping centres, hospitals, or other features of urban renewal, you should ask yourself whether these are the results of increased housing demand, rather than the causes.

About John Lindeman John Lindeman has well over a decade of experience researching the nature and dynamics of various types of assets at major data analysts and is a leading property market researcher, author and commentator. For more information visit Lindeman Reports.
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