Property market is back to normal

The property market had an extremely rare period of abnormality, but has now returned to its old self

There is no such thing as a normal property market in the way that most people think of it.

It is not normal for the market to rise so strongly, as it did for more than a decade up until a couple of years ago. However, if the market had done something completely different it wouldn't have been normal  either. There is no such thing as normal in that sense.

For the same reasons, the markets weren't behaving abnormally either. Markets behave in all kinds of ways that sometimes are (or seem to be) rational and at other times aren't.

What is a normal market?

My definition of a normal market has little to do with the direction it's going, and nothing to do with whether it's over- or under-priced. What I call normal is a market that's unpredictable. It is normal for the market to be impossible to call with any certainty except over the very long term.

Economists from Nationwide, Halifax and the Council of Mortgage Lenders try to call it regularly, and inevitably get it hideously wrong, forcing them to 'adjust' (i.e. make totally new and different) forecasts.

Those organisations clearly have an interest in supporting house prices.

However, economists from organisations which are more likely to be impartial usually get it badly wrong, too. The Economist and Capital Economics, for example, don't have a good record of regularly getting it right. Actually, no one does, which should tell us all something very important about making, or relying on, forecasts.

A recent example of a normal market

Consider that as much as six years ago some economists, as well as many homeowners or wannabe-owners, were saying that the market was overheating and had to correct soon.

That 'soon' didn't occur for another four years, as prices continued to rise rapidly until something (the credit crunch) finally kicked off a fall. In the meantime, almost anyone who held on from six years ago would still today get a significantly higher price for their property than back then.

We couldn't have known exactly when prices would fall, nor how much. Very few people got the timing right and, as usual, most of those who did were lucky.

I'm yet to find anyone who can call the market well on a regular basis, whether from my readers or from professional economists, and I've been looking for years.

(If you find such an oracle be sure to tell me as I'll pay for this creature's services in my articles, although no doubt it'll be snapped up by a big bank, lender or housebuilder before long, earning tens of millions.)

A more recent example of abnormal

So that's normal: a market we can't reliably predict.

I describe abnormal - and this may surprise you - as the opposite of my definition of normal. That is: one which we can predict.

There was a brief period - and by brief I mean not much more than six months - where we could predict the direction of the market reliably. This is extremely unusual.

What happened back in 2008 was, prices had been falling heavily for around nine months. By itself, that means nothing. Just because the market's moved one way for nine months it doesn't mean it'll continue.

However, over the same period we had something extraordinary. In normal times, there is enough conflicting data to make forecasts unreliable, yet, over this period, there was no conflicting data at all.

Everything was pointing viciously downwards.

Oil prices were extremely high, and unemployment and insolvencies were rising, but that's all that was up or moving up. Credit availability had plummeted, GDP was falling, confidence was collapsing, banks were failing, stock markets were diving, commercial property prices were plunging. I have to stop, but only because I've run out of synonyms for falling.

These things were not just happening in the UK, but globally. This means we couldn't rely on the world to give us a boost.

Under these exceptional circumstances, it was possible to call that the market would fall further for the foreseeable short-term future, as I eventually wrote about in December last year. (Read No forecast means more house price falls.)

The easiest forecast I ever made

Indeed, that one back in December was the only forecast I've made for years.

Strangely, when I was saying the market was abnormal and at its easiest to call for many, many years, some of the companies with a vested interest in keeping prices up, namely Nationwide, Halifax and the CML, refused to predict it.

Halifax used the bizarre excuse that it had just joined Lloyds as its reason, but the other two said the market was too 'turbulent'.

It's interesting how, when property or stock markets begin a downward trend, those companies with a vested interest use words like 'turbulent' or 'volatile'. Those words mean going up and down all over the place. What's so volatile about consistently plummeting markets?

If you consider that the only organisations that make forecasts public are the ones that use it to get their names in the papers, doesn't that tell you something? Most economists know to stay the hell away from the forecasting business.

But where next for house prices?

Do you expect me to make a prediction after everything I just said?

For the past few months there has been a variety of information pointing different ways. Yes, it is still looking very bad for us indeed, but there are enough mixed data and sentiment (in the UK and from abroad) to make the picture not so clear cut.

Prices are still too high - if you believe the affordability argument. Knowing - or believing - that doesn't make predictions any easier; it doesn't mean they're going to fall again over the next 12 months.

Prices are too low - if you believe the supply and demand argument. Knowing - or believing - that doesn't matter, because it still doesn't mean they're going to rise over the next 12 months.

That's the unpredictability of markets. In normal times, there is too much that we don't know, as I believe most economists - the ones you never hear from - would agree.

Maybe you think I'm soft for calling at such an easy time as last winter but not at any other time? Making a call in normal times would be the soft option for me, as it would be bowing to pressure to do so when I don't believe it's possible.

We'll still keep trying though!

None of this will stop people trying to predict the market. We simply have too much financially at stake and so we really want to know!

If you're going to continue to make your own forecasts, try not to fall into the usual traps of getting patterns to fit how you want them to and of ignoring counter-arguments. Do your best to consider all the evidence, not just evidence that suits what you want or supports your existing views. Indeed, try to play devil's advocate for a while to take your view apart.

At the very least, I hope that exercise will make you question the usefulness of forecasts, but if you find it works and manage to call the market right over the next few years, I may have some work for you!

Most importantly, remember always to consider what you can afford when you make a big housing decision, and allow a decent-sized safety net in your calculations. It's much more important than forecasting.

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