Predicting the Future -- Not.

[vaughan]

This thread was prompted by the "success stories" post by redwing -- not redwing's post, but the stories themselves.

It's a bit pessimistic, so be warned.

I'm new to IP, having bought my first in September 2011. As part of that process I've got my hands on a lot of sales and rent data from 2001 to 2011 for Sydney and have started analysing it. (I'm a database developer and one of my skills is pattern matching and problem solving, so I'm just looking for patterns.) My aim is to predict the future.

I need to cut this story really short because I can go on and on... so:

Capital Growth

For a lot of Sydney metro from Umina to Casula to Penrith, the median house price looks like this:

/\/

Starting at 2001 (where my data begins) there is a peak around 2004 and a trough around 2008, plus or minus a year or two. Depending on the suburb, the last peak is either just below or just above the 2003 value. Some suburbs (eg, Granville) have already peaked and are dropping again.

For the period 2001 to 2004 properties almost doubled in value -- Granville went from 220k to 400k. In the slump between 2004 to 2008 values dropped about 15% (Granville $320k) which is not good but hardly a crash.

From what I can work out, the period 1998 to 2001 was basically steady growth, so anybody that bought before 2001 did very, very well. People that bought after 2004 have been waiting to get back to their buy price, poor sods, and those that bought poorly and paid above market are still out of pocket. People that bought at the bottom around 2009 have seen some capital growth (eg, Quakers Hill) but nothing like the good times just 5 years before, and certainly not enough to make bold negatively geared strategies look good because in many suburbs the growth has peaked and reversed a bit.

Rent Growth

In generat the charts for rental growth for houses (units I have not looked at yet) look like this:

_/

... with the growth starting around 2004. Those people that held on through the peak of 2003 have seen their values drop (and return) but rent yield has been constantly growing.

The Future for CG

The bad news: if you were to take the previous 10 years and assume something similar will occur for the next 10 years, then I would not recommend property as an investment, especially one that relies on capital growth.

The good news: It's been a good time to buy since 2009 and this may continue for a while despite the market in Sydney dropping in some areas.

I have been searching for pattens and started to wish I had 30 years data to look at, but then I realised that that would be no use because the world has changed and each of the booms and busts have been for different and relatively unexpected (for some) global events, not what might be called "normal" market cycles. By that I mean: the GFC (bad); China and the resources boom (good); the woes in Europe (bad).

As far as predicting the future: I have decided I cannot do it. All that I know with certainty is that forecasts that assume constant positive growth (of any magnitude) are laughable in the next 5 years.

More to come later. I may edit or delete this post entirely. Do not take this as financial advice. YMMV etc.

 

[lizzie]

As far as predicting the future: I have decided I cannot do it.

Never a truer word said. No one can predict what will happen.

All that I know with certainty is that forecasts that assume constant positive growth (of any magnitude) are laughable in the next 5 years.

Not so true. There are pockets that will go up. Pockets that will go down. There has never ever been constant positive growth except for very very brief periods near the boom peaks - but even then there are properties that do better than others.

Constant positive growth is a fable created by those that either don't understand property investing, or journalists looking for simplicity for the dumbed down masses.

 

[vaughan]

Hi Lizzie

Until about 2003, constant positive cg WAS the norm. Really, the numbers say so. This constant and seemingly unending constant capital growth led to the following laws to be asserted...

property doubles every 7 to 10 years
low yield = high capital growth

... which were demonstrably correct for the period to 2004 because *everywhere* had constant capital growth. As long as an investment strategy included "buy house" it was successful.

My thoughts are that this period of constancy has gone, and we're in for a period of ups-and-downs for a number of years to come due to troubles and uncertainty with China, USA and Europe. (There is always uncertainty, but these are B-I-G uncertainties of really B-A-D things.)

 

[Aaron Sice]

if you're basing your whole argument on median prices, you should stop right here.

 

[lizzie]

Ah well - having been actively in the investing market for the last 10 years ... and in property for the last 25 - we will have to agree to disagree.

As an entire country, there may have been positive growth over that 10 year period - but there are always pockets that go up, and others that go down. Sweeping statements do no favours to anyone.

Off the top of my head I recall Tamworth in the late 90's (knew people who owned there and were trying to sell) was going down at a vast rate. Went up at a vast rate between 2000-04.

I think you need more than your 10 years of data, as that only takes you back to 2001 - the beginning of the current boom period, which was coming off a very long period of stangnant or negative growth.

Also to need to look at specific areas rather than Australia as a whole. The Gold Coast has gone thru some wild booms and busts in the last 20 years - as has inner Melbourne - inner Sydney - Newcastle ... and these are just areas I know.

 

[Graemsay]

As far as predicting the future: I have decided I cannot do it. All that I know with certainty is that forecasts that assume constant positive growth (of any magnitude) are laughable in the next 5 years.

"Prediction is very difficult, especially when it's about the future." - Niels Bohr.

There have been books and studies into randomness in the financial markets. The best known is Taleb's "Fooled by Randomness", but there's also "A Random Walk Down Wall Street", and (if you're mathematically minded) Mandelbrot's "The (Mis)behaviour of Markets". (Microsoft Research as a video on Mandlebrot about this, but I've not watched it yet.)

I don't know if this applies to the housing market, but I wouldn't be surprised if it does.

(The trouble with saying that some suburbs will rise and others will fall in a given period is that we don't know which will do that until after the fact. That's always a bit of a pain. )

 

[Sunfish]

I have never been an active PI but I have been a member here since '04.

The boards have, predictably, always been very pro property but many things have changed. It's as if they are still reading the same author but the third novel in a series. Some characters remain the same but the story is different.

I can assure you that in '04 the bulls were looking at the Sydney prices and laughing all the way to the bank. Anyone who spoke of provincial cities was scoffed at. His nic escapes me ATM but a medical doctor here at the time was investing in Townsville and Rockhampton and doing quite well but the choir singing the praises of Sydney drowned out his message. 20X20 hindsight tells us the choir was singing loudest at the very peak of the market.

Are those who were so wrong then still bulls and still here? Some are but their story has undergone constant modification. One thing that never changes is that you never sell. If you believe this how is it relevant to claim that "The market is always going up somewhere!" The "somewhere else" where it is dropping is probably where you bought last year. Hardly helpful for your financial health.

So while the basic story that it is always a good time to buy property has never changed, the "how and where" is under constant review and change. So much so that I'll say that anyone who naively follows what looks like good, sincere advice on SS, freely given by experts (I know they truly believe that they are being helpful) will feel lonely in a few years when they see the same experts still giving advice, just different advice.

 

[vaughan]

Lizzie I am only speaking about Sydney greater metro area. Not Australia as a whole. I state this at the top of the post.

Agreed more data would be good, but many of the IP "success" stories usually start with investors that got in late 1990s or early 2000s. (That's when I bought my ppor and am now using the equity to buy IPs.)

As for using median data: that's all I have got. I understand their limitations.

 

[Propertunity]

As far as predicting the future: I have decided I cannot do it. All that I know with certainty is that forecasts that assume constant positive growth (of any magnitude) are laughable in the next 5 years.

Actually you don't know that with any degree of certainty either

I have to agree with lizzie. I've been doing this for too long to believe that this period is any different from any other we've already had at some point in the past. Each boom & bust we have seems to have a different 'reason'.......yet the cycle continues on like the ocean tides.

 

[vaughan]

Well the original reason for the post was to declare that I cannot see a way to reasonably predict the future. I cannot see any patterns. Some appear in hindsight though.

I was lamenting to my wife that I need new data to find patterns, but then got an awful feeling that "new data" is just a more modern way of saying "new chicken entrails".

More and smarter people than me are working on this "prediction" and they are not getting it right.

 

[handyandy]

I can assure you that in '04 the bulls were looking at the Sydney prices and laughing all the way to the bank. Anyone who spoke of provincial cities was scoffed at. His nic escapes me ATM but a medical doctor here at the time was investing in Townsville and Rockhampton and doing quite well but the choir singing the praises of Sydney drowned out his message. 20X20 hindsight tells us the choir was singing loudest at the very peak of the market.

Must be starting to suffer from early onset Alzheimer.

Think you are thinking of See_change

http://www.somersoft.com/forums/showthread.php?t=11656

It's a bit of reminiscing going on at the moment.

 

[MichaelW]

Must be starting to suffer from early onset Alzheimer.

Think you are thinking of See_change

http://www.somersoft.com/forums/showthread.php?t=11656

It's a bit of reminiscing going on at the moment.

Hi Andreas,

Yep, I was about to post that bit of insight for Thommo. I always liked reading Cliff's posts and his deep analysis of his regional hotspots and riding the wave. He's posting again now and looking to get on the next wave out from Sydney if I recall correctly.

Gee, I feel like an old timer myself now. Still love this game and can't see that changing any time soon. The only thing that changes is the level of your experience and knowledge which in turn tweaks your approach.

And to Thommo, if I haven't said it before, thanks heaps to you and Evand for your tempering views. They've survived the test of time and been truly invaluable over the last few years. You've both been a huge credit to this forum.

Cheers mate,
Michael.

 

[Sunfish]

Think you are thinking of See_change

Thanks. I got hung up on aceyducey. Same time.

 

[Propertunity]

Thanks. I got hung up on aceyducey. Same time.

I miss Sparky's late Friday night posts after she'd had a few white wines

 

[VYBerlinaV8]

One thing that a couple of the successful property investors who's brains I get to periodically pick both say is when looking for investment properties to look for suburbs that seem 'unreasonably cheap', and then work out why that might be. If you can't find a reason, you may have found a bargain suburb, so it's then time to find a well-priced property within that suburn.

I never really understood this until I started doing it. I remember looking at a particular suburb in the middle of Canberra, and telling a couple of people of people about my plan. The response were always "no, you should buy over the road in <suburb name>, it's worth more". The problem is that there was no good reason reason why the suburb I'd chosen was cheaper. Sure enough, over a 3-4 year period it rose in value to be the same as the surrounding suburbs.

To invest successfully, I think you need to look not only at the overall market of a region, and not only at an individual suburb (or even street), but you also need to look at the relationship between the two, and what it might mean. It's important to ask questions that explain why an area might improve in value. Overall market movement is not generally enough.

 

[Graemsay]

I read somewhere recently that private investors tend to fail to match the overall (indexed) gains of whatever they're investing in because there's a tendency to buy into it at or near the top.

I'm guessing that See_change's posts on the attraction of regional centres versus Sydney is an example of this. Or VYBerlinaV8's Canberra suburb.

I agree with Vaughan that investors buying in ten or fifteen years ago have had a good ride. That's a combination of timing the market, along with time in the market. I'd hazard a guess that the next ten or fifteen years aren't going to be so easy due to macroeconomic factors such as deleveraging and the amount of bad debt in the banking sector.

(And in the spirit of my previous post, I'll get proven completely wrong for trying to predict the future. )

 

[Sunfish]

You hardly need a crystal ball to see that the confluence of factors which funded the house buying spree (which started decades ago) cannot be repeated. There will still be cycles of course but the major influences in my mind, were one-offs. As such I can't see them being repeated and certainly not as a "perfect storm".

This perfect storm began with birth control (family life was very different once). This allowed the "double income family". This new ambitious workforce forced political changes which, combined with modern production methods, pushed down cost of living (dramatically). You wont forget the role of the finance industry, of course.

Easy to see where the cash which financed the boom came from. Seriously, the average Mc Mansion people think is their right today, equates roughly to what we kids imagined film stars lived in in the '50s.

What are the equivalents which will fire up the next boom? Australia is an expensive place to live in again so reductions could be made in our cost of living. And someone mentioned a Japanese banking consortium today which sounds a bit like the Derivex model some may remember. That would allow significantly cheaper finance. Would that be enough?

 

[vaughan]

if you're basing your whole argument on median prices, you should stop right here.

Aaron, I'm interested to hear what other metric can be used instead of median prices.

I understand their limitations, but what else is there?

 

[our obsession]

Vaughan:

As part of that process I've got my hands on a lot of sales and rent data from 2001 to 2011 for Sydney and have started analysing it. (I'm a database developer and one of my skills is pattern matching and problem solving, so I'm just looking for patterns.) My aim is to predict the future.

You are an analyst, then this is what you do...kinda your brain fun?

I see some others have recc'd some reference material that might be useful, these might be useful, even though it isn't data. I study and research my areas of investment (property), I've known them over considerable time, having lived in them as a child, teenager, younger adult, but I do love to research and study them as worthy places to invest also, I've seen them prosper steadily over time, so I've been very comfortable to build my asset base from these areas. It's involved a more general, rounded research, the deal and figures is only a part of that, I also like to 'buy well' for my circumstances, my wants and needs, I like an IP with relatively good returns, I try to make money when I buy...so there are a lot of things going into the art of buying investment properties...

Anyway, these might interest you:

Dan Garner's 'Future Babble'

Brief look:

In 2008, as the price of oil surged above $140 a barrel, experts said it would soon hit $200; a few months later it plunged to $30. In 1967, they said the USSR would have one of the fastest-growing economies in the year 2000; in 2000, the USSR did not exist. In 1911, it was pronounced that there would be no more wars in Europe; we all know how that turned out. Face it, experts are about as accurate as dart-throwing monkeys. And yet every day we ask them to predict the future — everything from the weather to the likelihood of a catastrophic terrorist attack. Future Babble is the first book to examine this phenomenon, showing why our brains yearn for certainty about the future, why we are attracted to those who predict it confidently, and why it's so easy for us to ignore the trail of outrageously wrong forecasts.

...and Michael Shermer's article:

Wrong Again: Why Experts' Predictions Fail, Especially About the Future
----(05/01/12)

Excerpt only:

In his Newsweek column for September 19, 1966, the economist Paul Samuelson lamented that when it comes to predicting Gross National Product, "commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions!" Economists' prediction track record has only gotten worse since, along with the prediction-to-outcome ratio, which I have seen at 10:3, 7:2, and even 9:0 -- yes, economists predicted 9 of the last 0 recessions. With such bestsellers as The Great Depression of 1990 and Dow 36,000, economic forecasters have proven themselves time and again to indistinguishable from astrological soothsayers. But they are not alone.

Historians are among the most knowledgeable scholars of the past so you might think that they would be especially good at finding patterns and predicting trends. In fact, one of the smartest and most deeply read historians of the 20th century, Arnold Toynbee, was spectacularly wrong in his blockbuster A Study of History, in which he thought he had identified a challenge-and-response cyclical pattern that all civilizations follow: birth, growth, expansion, empire, and disintegration. Starting with Greece and Rome, Toynbee dug through the historical record to find confirmatory evidence for his theory (culminating in his call for America to rise to the challenge of its alleged mid-century moral decline). You would think he would have taken heed from his inspiration, the German historian Oswald Spengler, who erroneously predicted the "decline of the west" in the 1920s. But that's not how the mind works.

Why did Toynbee believe his own theory in the teeth of contradictory evidence presented by other historians? Because of the confirmation bias, which our brains employ to reinforce what we already believe while ignoring disconfirming data.....see article

 

[vaughan]

Our Obsession: there was a smiley after the "My aim is to predict the future" in my original post, and it was there for a reason.

Your quotes perfectly highlight the problems I am having: the "experts" create models of awesome and impressive complexity that seem to work perfectly until they don't. It's working out when the limit is reached.

I'm taking the opportunity to do a brain dump here and get my ideas out into the wild. The challenges include the following issues:

limitations of the data available -- median or average; biases due to sampling or selection processes; time lag between the collection of the data and its publication typically 2 to 3 months (Aaron)

boom and bust cycles are from causes that are unlikely to be repeated (Sunfish)

It seems to me (selection bias) that strategies that rely on cg are speculation.

More later, I gotta run...