This comes from ARWs blog where he (she?) takes a position on whether it matters when you buy a house.
I can’t argue with the commentary. If you look back over the past you can calculate what you would have saved if you had timed market entry and exit better.
Unfortunately, we don’t buy houses (or an financial asset) in that way. We have an option to buy today based based on a market price (the full information in the market) and our own expectation (as they differ from the market) and our own beliefs.
My contention is that, while you can easily prove that the timing of entry will effect ex-post financial return, that doesn’t imply that you can alter the ex-ante expected return by trying to time the market.
The short answer is that this problem is the same one faced by an equity investor. Buying low and selling high into the ISEQ will lead to greater returns that buying high and selling low. Of course, the problem is we don’t know what “high” or “low” are in an ex-ante sense. That information is only revealed after we have made our play. In these equity markets then there is an accepted philosophy and a good adage by which most investors should adhere:
So is the property market one that exhibits unusual characteristics that make it a special case. One where there is an expected (ex ante) return to timing? Intuition would say no, but it would make for an interesting academic paper.
For the average investor I agree market timing does not work for equity investments. Some very successful investors do seem to be able to pull it off but the jury is out on whether it’s skill or luck (fooled by randomness and all that).
The assumption for the above in equity markets is that all investors are dealing with perfect information (or close to it). I don’t believe the same holds for the property market - I know that many of those on this board knew from the middle of '06 that sales had stagnated. We also believed that it had all the appearances of a financial bubble. The sales data was akin to insider information in an equity market sense.
Throw in also the relative delay in feedback loops for property versus equities and I do feel that there is a market timing opportunity for fairly “ordinary” investors in property that I don’t believe exists in equities. But like you say this is based on gut instinct and would really need to await a formal analysis.
You can make money from timing equity and/or property markets, but its difficult and risky - knowing something’s undervalued or worse still overvalued might be right over the long run, but betting against the market can often be a money loser for a significant amount of time.
Part of the problem is that there are no methods advertised for working out if buying a house is a good financial decision. I bought at what I thought was the bottom of the market in England in 1990 for 38,500 and by a year later the house was worth 32,000. I sold in 2000 for 72,000. The point is, I thought I was timing the market well based on the previous falls and the fact that interest rates (at 16.25% were at the top of the cycle). In hindsight what I should have done was to rent for a while and look to buy when prices started to edge up/interest rates had come down a bit.
Based on this experience and the whole “rent is dead money” nonsense, I propose this method for deciding if buying is a good financial move:
If the interest you pay on the mortgage (at the full rate, not the intro one) is less than you are paying in rent for an equivalent property, then it is a good idea to buy. Otherwise, you should stay renting as you are saving money.
Timing the equity market is impossible because the EMH holds.
It is assumed (and I strongly believe) that prices reflect all available information quickly and accurately.
I don’t think these statements are true of the property market.
Most residential property market transactions are undertaken by private individuals with little or no knowledge of all information available to them.
Can these individuals therefore be considered rational?
Tests of EMH imply that although it is possible, in some situations, to forecast the market the costs of doing the research etc. are higher than the expected gain.
Again I don’t believe this to be the case for the property market.
There is a large set of available information that is not used by the average individual in the market. e.g. Property Pin, IPW, Daftwatch etc.
The cost of obtaining this information is negliable if you know where to look.
Property prices react much slower to new information than would be acceptable under the EMH.
Plus, is it not the case that the few long-term house price data series we have (from Holland, the US and the UK IIRC) all agree that in the very long term property always has a real return of around 1.5%?
If that holds true, then “time in the market” is irrelevant because you’ll only ever get a real return of 1.5%, whether you hold for 20 years or 50.
So, an illiquid asset with very long transaction times, high switching costs, and a chronic lack of information (especially in Ireland) available to most participants, with some evidence that the long-term real return is static and low. Very different from the stock market.
Everyone here knew the game was up last summer, but the public are only beginning to catch on now. I’d be fairly confident we’ll be equally ahead of the curve when/if the next upswing starts. I’d say market-timing in property markets is very possible, as long as you know what you are doing.
The only pitfall I can see is cashing out of a bubble too early - if most of us were trying to play the market in Ireland we’d probably have cashed out in 2002?..but sure what loss is that, really? As long as you make a healthy profit and get out early leaving the frothy top of the bubble to the greater fools while you have your profits securely making steady cash for a few years till the next bottom, I’d say you could do very, very well at that game.
Of course, all the above applies only to people deliberately trying to play the market. People who want a long-term home to live in have different concerns and criteria…but even there buying near the top of a property bubble is just silly. I certainly don’t regret not buying after 2002, because I still think anyone who did is at still at risk of negative equity (if they have a bad LTV)
To be honest I don’t think there is a difference in the property market. Property markets around the world seem to be made up of a never-ending series of bubbles. Crash, wait 12 years, rinse, repeat.
Spectacular extremely rapid changes in a nation’s fundamentals like Ireland had in the 1990s are very, very, very rare. And housing is the one asset class everybody can pile into and believe they “understand”. Tis simply natural population-wide herd-mania territory.
Think back just 12 months - after the peak had already passed. Think just how small the Irish Bear Club was (online at least). Think how universally derided and despised we were. There was what, maybe 10 of us holding the line against a nation-wide tidal wave of complete insanity here, on AAM, boards.ie, politics.ie, various other fora. And in real life? I was the only bear I knew. Everybody else I know vehemently disagreed with me. Most of them still do!
Maybe we should get a T-shirt made for that small and dedicated band of Original Bears
With the huge demand still out there, straining at the leash to get on the ladder, continued price-falls (preceived and actual) will cause the chain to break and let them pile in, slowing/stoping further falls and maybe even engineering rises for the most desirable houses.
Not so much a dark side, as a light shade of grey!
Person/Couple A just bought a “starter home” 1 bed apartment and is worried about Negative Equity. Lighter shade of grey for Person A
Person/Couple B** are newly weds currently renting, hoping to buy a 3 bed semi to start a family and to hell with “starter homes” as they want to get at it NOW, her clock is ticking afterall, a crash with falls of 99% hehehe would be the bright side for them!
While I belive this will ultimately come to pass, let’s not forget the power of the herd mentality. The pressures which worked to drive the prices to insane highs will IMO do the exact opposite on the return leg.
When the great unwashed become aware that the shoe/investobox they are thinking about going into hoc for may be worth 2K less next month they may well be content to sit on the desposit a while longer to see what happens next month. This will cause the same feedback loop we saw on the way up, just that it will work the other way now.
The sheer size of the investor market in the last three/four years means crashandburn, that your “huge” demand to get on the ladder is dwarfed by the potential and now realising stock of shoeboxes that are being unleashed in the wider commuter belt.
You’re also failing to tie in the reality that banks will pull the funding for these desperate hordes that you seem to see appearing over the horizon, sure, they’ll go sale agreed and prop up the price but then the bank will come in, do the valuation and pull the deal.
Nice houses in nice areas sure.
But there are alot of marginal properties out there and few takers for those.