The Property Voice Podcast - Series 2: The 6 Key Areas That Determine Property Prices
How can you predict a housing boom or bust? Well, how’s about we share the 6 key areas that help us to determine the direction and speed of travel of house prices? Knowing what to look for will help us to make better decisions in our property businesses. Find out who called the last crash correctly and what you can look for to avoid the next one in this week’s show.
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
So, last time we shared the interview with Akhil Patel, who explained his research and views on what has become known as The 18-Year Property Cycle. This week, I just wanted to highlight what I am going to call the 6 key areas that determine house prices generally speaking. Then, by observing changes in these 6 areas, we should be better equipped to draw some conclusions, if not as to the exact timing of house price booms and busts, at least to a general direction and speed of travel.
OK, so let’s get straight into the meat of the show with Property Chatter.
Last week Akhil Patel described the 18-year property cycle and how it was both cyclical in nature (obviously) but also predictable. We go from boom to bust to boom again with alarming regularity. But why is this? How does he and some others see a clear & predictable pattern and how can the average property investor learn from this…without the need to have a mega calculator and computer model? How can we be vigilant and see some patterns emerge before they take place?
I was giving this concept some thought and I was wondering to myself…as I often do, what are some of the key elements of the property market that we can look out for and incorporate into our own planning? I thought I would share some of these factors today to give some pointers at a top level, so we can at least be vigilant. Now, it could be that we can engage the advisory services of someone such as Akhil, however, before we do that we can at least apply some general principles I believe.
One word of warning however. The mainstream media and many market commentators often seem to get it wrong when making house price predictions. So, who has gotten things right then instead then?
Well, some of the ‘Contrarians’ to look out for are:
- From the UK, we have Fred Harrison followed, who is more recently by Akhil Patel along with Phil Anderson from the States, with the 18-year property cycle. Then we have The Market Oracle, Nadeem Walayat, who accurately called a Conservative majority election win based on house price growth
- Then we have Professor Steve Keen a UK-based Australia & Robert Kiyosaki from the US, who both accurately called the 2008 global crash
- Finally, we have the American Robert Shiller who observes house price trends suggesting that they tend to revert to the mean or average in real terms over time. Or in other words, they follow a predictable pattern after inflation.
So after those references for your to check out, what are my personal thoughts on the key drivers of house prices at the top level? I would like to suggest that that there are 6 key areas that give us clues about the direction of house prices.
The key drivers of any property cycle could be summarised as being influenced by these 6 general factors:
- Supply and demand
- National and personal economics
- Credit conditions
- State intervention
- Socio-political factors
Taking these in turn briefly then,
- General marketplace factors of supply & demand, KPIs:
- Housing starts & completions
- Population & household growth
- National & personal economic factors in particular earnings & affordability, KPIs:
- Economic cycles & industrial growth (growth, stagnation, recession)
- Wage inflation vs. general inflation
- House price / affordability measures & trends, personal debt & bankruptcy levels
- The financial sector and in particular access to credit & lender policy, KPIs:
- Lender LTVs & other policies
- Banking profits & lender competition
- The role of Government & the Central Banks with centralised intervention policies, KPIs:
- Interest rates & the money supply,
- Budget surplus / deficit & national debt levels
- Sentiment and psychological factors, KPIs:
- Speculation on prices (greed & fear)
- Trend lines and how steep the line is heading
- Media hype & ‘tallest building contests’
- Social & political factors, KPIs:
- National & international crises, riots & wars,
- Birth / death & life expectancy rates & immigration
- Political persuasions, power shifts and changes in the same
Putting it all together, we can start to observe some of these key data sets and start to figure out both a direction & speed of travel if you like. If we were to keep a clear head and merely observe some of these key metrics or performance indicators, we will start to see a trend emerging.
Consider then these influences in each of the key areas mentioned:
- Supply & demand - What would happen to prices if supply started to increase? Where are the cranes most concentrated? How about with immigration swings, birth, death & divorce rates?
- The general & personal economy - What about people’s earnings levels and relative to inflation? How much can people afford to spend on housing in absolute cash terms…where is the ceiling?
- The role of the banks - What about access to credit, how do the financial community exert an influence on prices?
- Government & the Central Bank - What is the Government / Central Bank doing about interest rates – they use interest rates to control spending and saving in general?
- Sentiment & psychology - What are the tabloids saying to stir things up and what are people talking about in the pub or around the dinner table?
- Socio-Politically - Who has the most to complain about in society and is this driving political change and wealth redistribution?
These are some of the questions that we can ask ourselves to assess where we are in general terms. Then, if we are really smart, we might also start to track these metrics over time to observe their trends.
So then, whilst we may not know the exact moment when the housing market will change direction from up to down or vice versa, at least we will have a general idea of which way the wind blows and be ready for when it does.
If we were to know that we are on an upward curve what would be our approach to borrowing levels & interest rate fixes, cash resources and our rate of acquisition or disposal?
On the other hand, what if we were heading downhill, what then?
How about property strategies then…we alluded to this last week and there is more to come here from Akhil and myself, so look out for that.
So in conclusion, having some insight into the general direction in these 6 key areas might make us just a little more prepared both to avoid some of the threats but also be ready for opportunities of housing market movements as they arise.
What are we seeing right now in the market in these 6 key areas? On balance, it does rather suggest that we are on an upward curve…but for how long? The 6 areas will play out in their own way and so it is tricky to predict with any real degree of confidence…unless of course you have the brain the size of a planet such as the likes of Akhil Patel, Professor Steve Keen or Nadeem Walayat say…however, at least we can start to be aware of, track and then consider some of the top line factors that underpin house price movements for ourselves.
I hope that allows you to have more awareness of the drivers of the housing market in general. We may not necessarily be a master in timing, at least an observer of direction changes in the housing market. Knowing these things at least, could serve us all very well with our investment plans, of that I am sure.
So, that’s what I wanted to share with you in today’s episode, I hope that was useful.
Next up though…it’s Your Voice.
Today we shall share another 5-star iTunes review we had from Bdonkin
Wow great stuff - perfect for in the car between viewings 😀 May 6, 2015 by Bdonkin from United KingdomLove the format and content, working my way through them all now, they get better each time! Keep them coming 🙂
Thanks for your great reviews, it makes the world of difference to us to know you are enjoying the show and also helps to spread the word more widely of course. The Your Voice segment is all about you and your opinion. Whether a review, a question, a property story or just a good old moan, we are here for you!
So, drop me drop me a note with what’s on your mind and we will try and feature as many contributions in the show as we can. You can email firstname.lastname@example.org to start a conversation or drop a comment on our The Property Voice Facebook page, tweet @PropertyVoiceUK or leave a voice mail via our website…
Buy now, it’s the Shout Out
This week’s shout out is suggested by a regular listener called Carl, who having listened to an episode on time management, suggested a couple of resources to assist with managing our time and productivity.
StayFocusd - Allows you to limit the amount of time you spend on distracting and unproductive websites.
Rescue Time - Automatically logs time spent based on application or website. It will email you frequently to report on your usage. You can configure it to determine if certain apps/sites should be considered productive or not. You can also set goals/targets.
To be honest, we have given Rescue Time a mention before, but there is no harm in mentioning it once again – I found it helpful to monitor my online ‘dead zones’ and now this is OK I had stopped using it…however it is worth checking in from time to time just to make sure no bad habits have crept back in. I have yet to try StayFocused, although an alternative could simply be to switch off wifi…or am I being a little too brutal with that idea I wonder?
Thank you Carl for those suggestions, we do like to feature our listener contributions whenever we can, so keep ‘em comin!
Just before I run…and talking of running, just a reminder that this weekend I have my 10k charity run. I will hopefully be able to report on my progress in next week’s show, but I did write a blog post with the back story behind this Amazonian school and their amazing teacher and inspirational children if you would like to check it out. The post is called: Giving in Action…supporting an Amazonian School. Meanwhile, wish me luck!
Ok, so that’s all we have time for today then.
But for now, all that remains for me to say is: thank you very much for listening again this week and until next time on The Property Voice Podcast…it’s ciao-ciao