Economists and city analysts have a woeful track record of predicting market crashes.
This has been well documented:
“In 2001, a study by Prakash Loungani an economist at the IMF, looked at the accuracy of economic forecasts throughout the 1990’s – both public sector and private sector -in the International Journal of Forecasting. He concluded that “the record of failure to predict recessions is virtually unblemished”. As Tim Harford notes in the FT, in 2014 he repeated the exercise…
…staggeringly, he found that even in September 2008 – well after the demise of both Bear Stearns and Northern Rock, and the same month that Lehman Brothers collapsed – the consensus among economists “remained that not a single economy would fall into recession in 2009”. (Source – MoneyWeek)
The world of stocks and bonds is not my area of expertise, but London property is and economists’ and city analysts’ track record on predicting busts is diabolical. They were largely pessimistic up until late 2005, when the last of the bears capitulated, and then from 2006-2007 conventional wisdom was that “prices only went up”.
In other words, they changed their view at precisely the wrong time. Meanwhile, in 2005 I said that the market would crash c. 2007/2008 (if you would like evidence of this, please email firstname.lastname@example.org).
But, why do they get it so wrong?
After all city analysts, economists, etc. are incredibly intelligent people with huge numbers of researchers and computing power behind them.
As we know they are not stupid, this tells us that either their models must be fundamentally flawed or they are looking at the wrong indicators. In fact, it is both, but let’s look at the indicators:
The house price to earning’s ratio is the pessimists’ favourite indicator - you may have read about it in the press. And you can understand why it’s so popular: if people earn £x and can only borrow £y then the maximum prices can go to is £z giving a maximum house price to earnings ratio.
Now history has proven that whenever the market has crashed, the house price to earnings ratio has been above 10. This is true. Unfortunately, this fact has been twisted, so conventional wisdom now believes that whenever the ratio goes above 10 the market will crash.
But that is incorrect - just because whenever the market has crashed the ratio has been above ten is not the same as the market always crashing when it is above that level. Indeed history has proven that in the UK (and also the U.S.), there are far, far, far more examples of the ratio being above 10 and the market not paying the slightest bit of notice. Take this report from 2002:
“The top of the property market has been in trouble for some time… Property in some outer London boroughs now changes hands at phenomenal multiples of average local earnings - the prices being pushed up by a relatively small number of people driven out of expensive parts of the city.
In Bromley, for example, house prices are now 10.4 times local earnings” The Daily Telegraph
As we know the market wasn’t in any trouble at all and prices continued to soar dramatically into late 2007. In other words, the house price to earnings ratio is a truly dreadful indicator used by itself and yet more evidence, if any were needed, that conventional wisdom is almost always wrong.
If you need further proof consider this:
In 2017 you needed a minimum of £110m to feature in the Sunday Times Rich List. In 1997, one “only” required £15m, i.e. in 20 years while the average wage in the UK rose from £16,500 to c. £25,000 and the FTSE increased from 5500 to 7500, the net wealth of the richest increased 700% and house prices increased by several multiples.
If nothing else, this shows you that the house price to earnings’ ratio is a truly awful indicator. Secondly, it also explodes one of the other great fallacies – that London house prices are correlated to the stock markets.
Unfortunately, the masses base their decisions on what is written in the press when just a little bit of analysis shows that it is almost always wrong or at least very misleading. And as house prices are an emotive subject, the more negative the news the better for the press. This creates a negative loop – especially as the press has a negative bias anyway – which feeds into conventional wisdom/dinner party conversation.
The same is true during the “crack up” boom before every bust. Conventional wisdom and popular opinion will tell you to buy when you should actually be being cautious. Just look at the press in 2006 and 2007. We were told we had a new paradigm and prices did only go up!
But conventional wisdom is almost always wrong. This is why Warren Buffett has proven to be rather successful by being greedy when others are fearful and fearful when others are greedy, i.e. he goes against conventional wisdom.
This is not easy to do unless you have information you can rely on and, even then, it is difficult. But for now, please ignore the “noise” in the press and ensure you only focus on those specific few indicators that have proven to be reliable over dozens of previous cycles.
Who am I and why should you listen to me?
My name is Jeremy McGivern. I am the founder of Mercury Homesearch, the internationally renowned property search consultancy, and author of The Insider’s Guide To Acquiring Luxury Property in Prime Central London. I have been acquiring property in prime central London for clients for over 13 years.
Having physically viewed over 22,000 properties in prime central London, studied the details of over 153,400 apartments, houses and investment opportunities and spoken to 232+ estate agents every week for over a decade, my advice is in high demand and has featured everywhere from Bloomberg Television, The Financial Times and The Daily Telegraph to Forbes India and Bahrain Confidential.
Please note that the strategies and techniques revealed in the book and CD’s are not just theory. They have been tested and proven over 13 years of acquiring hundreds of millions of pounds worth of prime London
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