Are we in for a property crash?

A friend of mine messaged me effectively saying/asking:
– Russia likely to invade Ukraine
– A run on the dollar
– Big property investors selling up and waiting for the correction
– Manchester is so hot, isn’t there going to be huge correction?
– Should I advise buyers to stop purchasing?

Huge topics…

Capital growth corrections.
I’ve been analysing this and looking at the relationships between areas that got very hot in the last leg of the last property cycle: 2003 to 2008 and overall:
— There’s a 50% or so correlation between areas that got too hot and declined heavily.
— Too hot equals over 120% real inflation-adjusted growth between 2003 and 2008.
— Crash equals = 20% or more decline in real inflation-adjusted prices
— the greatest growth is was with ‘low value housing’ being sold off. I.e. selling council houses
— More expensive areas typically didn’t rise so much and didn’t crash so much.
My capital growth page is useful for looking at how areas played out: https://invesmore.com/capital-growth-by-area/

Key: red is a high number,  green a low number.  |   This data shows inflation-adjusted capital growth for median house prices. |  Data originated from land registry and office of National statistics, interpreted by me: Nick Garner

The trouble with investment:
– it’s always speculative to one degree or another. Therefore it’s based on hope, or at least expectation
– It’s about the future. If any of us try to imagine the future, it’s hard. Therefore it’s frightening.

I’m not really an expert in predicting market behaviour, but people like Ray Dalio are.
Their thesis: “history never repeats self, but it does rhyme”
Jeff Bezos thesis: “look for what will remain the same”

So, people will still need to live in buildings.
Some people will need to rent.
Jobs and money will still be a thing
Chronic long-term inflation is very likely.

And if you look at the 1940’s it rhymes with today:
– Lots of fear
– High government debt
– Inflation driven by shortages
– Shifting world powers
– Huge social change

And we have:
– Brexit
– Covid
– Huge government debt
– Shifting world powers
– Huge social change

If you look at property in the 1940’s – there was massive house price inflation. You would think the opposite would be true? Lots of people dying in the war, means more property to go around?!
But with chronic repetitive cycles of inflation, people got their money out of cash and put it into an inflation hedge: Property.

Dollar decline
If the dollar declines, so will Stirling. That makes UK more attractive for internationals seeking safe haven in UK property.

Russia and Ukraine
The eastern side of Ukraine is pro-Russian. So worst case scenario I imagine: there would be some fighting, but the international response would probably be similar to Crimea. Some sanctions, some issues.
The world has much more serious things to worry about: China

China
If you follow long-term demographics, you’ll know that after every 80 years or so there is a period of conflict. And the 2020’s will have plenty of conflict…
In my opinion China will only become more ‘socially homogenised ‘ and I expect they will be capital flight controls for territories like Hong Kong.
More importantly, there can only be one top global superpower and whenever there is a power shift, there is always conflict. Ray Dalio (the world’s most successful hedge fund manager) and his research team have written about this extensively: https://www.linkedin.com/pulse/chapter-1-big-picture-tiny-nutshell-ray-dalio

Big investors selling up
They work in a different ecosystem to the vast majority of investors. Those people depend on huge amounts of easy, cheap money. And they know that money is going to get a little bit more expensive.
Also on the residential side, they’ll typically be involved with apartment blocks and other large developments, not single family units. And in my opinion city centre apartments are oversold. I.e. there is a massive oversupply of ‘two-bedroom lifestyle apartments’ in almost every city in the UK. (Data shows us how slow city centre markets are)

Overall, when I look at the property market I liken it to an ecosystem of an infinite number of vaguely connected interactions leading to an outcome. A bit like financial markets.
The government make it expensive to move, people don’t want to sell, lots of people are looking, only a few can afford to bid up the price = rising prices

Property crashes
Markets are very localised. Whilst most of the UK property market was in decline between 2008 and 2013, central London saw the strongest capital gain to date. In fact, whilst the rest of the country has seen a surge in property prices, central London has remained fairly stagnant. Overall property prices have declined when adjusted for inflation.
When you look at the last property crash, there was huge disparity between different areas (see the screen grab. Dark red is biggest crash)
Ultimately property crashes occur when
– either money gets expensive i.e. a big hike in interest rates or people cannot get access to money i.e.
– lenders won’t lend because of government restrictions
– there is mass unemployment and people just can’t afford to buy or aren’t creditworthy enough to get finance.
But as you’ll see from the map, the property crash wasn’t really that uniform.

Everyone predicted the UK property market would crash once furlough financial support finished. But people didn’t factor in 14 months of imposed savings i.e. no ‘going out’ expenditure and so the UK property market has mostly gone… up!

Overall
I don’t try to predict big outcomes based on any specific factor. Instead I look at patterns and cycles which have repeated over time. When there is a good ‘fit’ for a specific pattern to repeat, I follow that as my guideline.
That’s why I completely believe in the 18 year property cycle, because it has repeated 8 times since 1845. And we are now in the 9th cycle.

My prediction:
– We’ve got four years of this property cycle left.
– It’s a good idea to buy and hold within the next 18 months
– Property markets are very localised, so who knows how extensive the crash will be in the UK… But there will be a crash, because there were 8 of them over the last 150 years. (18 year property cycle)
– If you buy in places where creditworthy people want to live, you can be fairly confident property prices will hold up.

My final thoughts:
– Think about what will remain the same.  People need to live somewhere, some need to rent, people will have jobs, investors will still make money.
– Study the research from Ray Dalio…
– Stay level headed and objective whilst others lose their minds.

Worth reading: Ray Dalio – changing world order.  https://www.linkedin.com/pulse/chapter-1-big-picture-tiny-nutshell-ray-dalio/