Whenever there is a house price crash you will see expert after expert patting themselves on the back and suggesting they predicted the event. They will be praised in the press, build up a reputation which helps them for years to come and many can make a very successful living off one very public prediction. However, predicting house price crashes is a fool’s game for a number of reasons and all may not be what it seems on the surface.
There is nothing more fickle than investor sentiment where fear and greed come into play, very often pushing sensible investment criteria to one side. When you hear talk of a stock market crash or a property market crash the “bargain hunters” will prick up their ears and ready their funds. If you look back over previous stock market and property market crashes you will see that none of them were ever predicted with any great confidence. Yes, there were predictions in the years prior that markets were overvalued but they came to nothing – even if they were repeated on a regular basis. Eventually, after crying wolf so many times it eventually happens.
Recent report highlighting regional property price issues
There was a recent report in the press which highlighted areas of the UK which were perhaps more prone to a short-term house price crash. The idea was that as lending was going down and house prices were moving higher this would stretch household finances. By calculating the difference between the drop in borrowings and the rise in house prices the idea was this would give an effective danger rating. But how does this work?
If there is a reduction in lending then surely investors are being more conservative and risk averse? If house prices are rising then either homeowners with significant equity in their properties are downsizing or upsizing with their savings? It is difficult to understand how a reduction in lending can be negative especially when the rate of house price growth is less.
Left holding the baby
Whether you are looking at property prices, stock market valuations or any other investment market, the principal is the same – buy and sell an asset to make a profit and leave the next investor to worry about the future direction. Have you ever looked back at previous property market rises to see patterns emerging?
Prices often rise to levels which are unsustainable on traditional valuation terms but which economic environment would you describe as traditional? Does the idea that some markets are struggling today takes in the fact that base rates are at historic lows? We know the potential risks going forward as base rates rise, whenever that may be, but investors are willing to take that chance because of minimal savings rates for one example. Many property investors are happy to take a chance on short to medium term investment opportunities and then pass the “baby” to the next investor.
When experts begin forecasting “for certain” that specific areas of the UK are on the verge of a house price crisis it is difficult to take them seriously. Surely a crash is not really a crash if you see it coming?