Chapter 5: Is the Property Market Overvalued?
This is an extract from the ebook How to Really Buy a Property.
What's covered in this chapter
- Why modelling or predicting the market is so difficult;
- Why logic does not seem to apply;
- How the market innovates;
- When historical data can be misleading;
- Why applying logic doesn't work;
- Why calculating price per square foot doesn't work;
- The true story of a buyer who paid twice the asking price.
Modelling the Property Market
First time buyers and amateur investors tend to have a habit of modelling the property market in no end of ways. They look at what the average buyer is borrowing or how much of their disposable income they are using or basically search down any data that will support their argument that the market will crash violently and they will be able to buy a two bedroomed property in EC1 for £50,000.
No matter what you put in your fantastic spreadsheet remember this:
A perfect example was the Nationwide, much of whose business rests on the property market. In January 2013 they predicted house prices for the year would be static. According to their own records prices actually rose 8% in the following 12 months.
Capital Economics, a major think tank with massive statistical resources at their disposal, predicted property prices would drop 20% in 2009 but they did nothing of the sort and remained static.
And they can just as easily be wrong in the other direction. In late 2007 most lenders were predicting a market where prices would remain static the following year. By March they were all revising their forecasts again. The effects of unknown global events made prediction a very rough guess at best.
A full analysis of the 'property experts' used by the media and their track records up to 2012 is in the chapter Making House Price Predictions
Tanya wanted to buy a two bedroom 890 square foot flat in the Ice Wharf development by Kings Cross. The property was on the market for £290,000 but this was beyond her budget. She spent hours on the internet investigating the sizes and prices of other flats in the area and came to the conclusion, with the help of a large spreadsheet, that the going rate for a flat in the area was £269 per square foot which meant the property she wanted was really worth about £240,000.
She made her offer and was at lengths to insist that her evidence was passed onto the vendor. The offer was rejected and three weeks later the flat went to sealed bids with two completely different buyers and exchanged a month after that for £302,000.
Tanya's evidence was absolutely sound but what she had failed to understand was that certain developments within an area hold far more appeal than others. It's a fact she should have recognised because she did not want to buy any of the other properties that she had based her evidence on.
So why is it, with all the research based on seemingly sensible data, that the property market does not react the way it should.
There are three fundamental reasons:
- The property market innovates
- Averages just don't work
- History is not always a prediction of the future
The Property Market Innovates
Simply put lenders and property sellers continue to find ways to ensure prices can continue to rise over the long term. In the 1960s this was the introduction of the mortgage. Highly unpopular at the time, when debt was frowned upon, they have now become a way of life and allowed property prices to rise faster than salaries.
In the 1990s it was 100% mortgages which rid the need for buyers to find a deposit. In the millennium it is shared ownership so the buyer only needs to find 50% of the property value or mortgages spread over more than the traditional twenty-five years.
A classic historical example was work carried out in the 1800s which looked at the rapidly rising population of the UK and concluded there would soon not be enough food to go round. This meant starvation along with civil unrest could not be far away. But agriculture innovated. The number of people living on this small island is now far beyond what our Victorian mathematicians imagined and there is still food on the table.
Averages Just Don't Work
One of the key measures commentators on the market use when speculating the future of the housing market are long term averages. For example, the logic goes that if the average property price has reached four times the average salary then real estate values can no longer move up.
But these is a highly misleading methods. Highly misleading but easy for people to understand and so ideal for newspaper columns or the evening news.
and all the others, when you
purchase the ebook How to Really Buy a Property