The issue with past performance

Many experts assure us that past performance is a good indicator of what to expect in the future.

I have investigated how they rely on past performance to make their forecasts and have come across a huge contradiction.

Some analysts claim that a history of strong growth is a reliable predictor of more growth to come, while others take the opposite view, assuring us that areas that have not performed well in the past are overdue for growth.

Both of these statements seem logical, but only one can be correct – or maybe they are both wrong.

Only buy in locations that performed well in the past

One group of experts claim that we should only buy properties in suburbs that have “stood the test of time”.

They say that their high performance in the past offers us not only the greatest level of security but the best prospects of continued price growth into the future.

This is based purely on the expectation that high past performance generates better future performance.

Only buy in areas that are overdue for growth

Another group of experts does the exact opposite, relying on the absence of past performance to select areas that are “overdue for growth”.

They talk about “mean reversions” and “market cycles” to pinpoint locations where prices have not risen for years, claiming that such markets will soon catch up to those that have experienced high past price growth.

Future performance is not linked to past performance

The reason that we have these two persistent but conflicting theories is that they both seem to work.

Some locations do experience continuous price growth while others can boom after years of little to no growth.

But, this only proves that future performance has no relationship to past performance at all.

The only times that prices rise are when buyer demand exceeds the supply and they will fall when the supply of housing is greater than the demand.

People do not flock to affordable locations

When strong past price growth makes some areas unaffordable, potential home buyers do not flock from one State to another seeking more affordable homes - their ties to work, family and friends are far too strong.

The fact that people stay put and wait until buying conditions improve was dramatically illustrated by the Tasmanian Government’s attempts to lure home buyers to the island State back in 2014 with its Make it Tasmania initiative.

A new Department of State Growth was set up, offering state-sponsored business support and employment resources along with generous cash grants and home buyer stamp duty exemptions, encouraging people to relocate to Tasmania.

At the time, Hobart had the lowest median house price of all our capital cities, and Tasmania’s house prices were more affordable than any other State or Territory.

Everything was primed to lure home buyers from the mainland to Tasmania.

But, did those incentives and low house prices motivate people to move there?

As the graph shows, according to the Australian Bureau of Statistics Housing Finance stats, the number of home buyers fell in Tasmania between 2014 and 2015.

But, at the same time, the number of home buyers rose in the eastern mainland States, which shows that people were not sufficiently motivated to relocate.

Make it Tasmania was abandoned, and its archived website and social media pages stand as silent witnesses to the fact that people don’t move interstate just because of past property market performance.

The secret to strong housing market performance lies in the future, not the past and only those who understand how the market actually works can make accurate forecasts.

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.