1. Realise that house prices move in a cyclical way. The peak to trough cycles are normally between 18 an 25 years. The easiest way to make money in house prices is to buy after a crash in the couple of years that house prices traditionally trundle along the bottom. The illiquid nature of property means that it can be no other way. There has never been a crash in history where house prices had a V shaped correction. Every correction in history has been U shaped.
2. Understand the anchors which limit house price growth. If you understand how a house should be priced fairly, you will have a huge advantage over the rest of the speculative and residential market in buying at the right time.
3. In property, we have often been told about location, location, location. Where you buy the property will determine to a large degree how much money you make on it in the future.
4. Understand that you make money in property when you buy, not when you sell. The purchase price you pay for a properly will determine to a large degree how much money you will make
5. Take into consideration interest rates. The cost of funding a mortgage is very closely tied to the value of a property in normal markets. We are seeing an exception to this rule at the moment but the cost of mortgages has been replaced as a value anchor by their availability.
6. If first-time buyers are priced out of the market, watch out … the good times maybe over soon. Every property bust in history has been preceded with a period in which it was very difficult for first-time buyers to get onto the property ladder.
7. Understand that earnings are the ultimate determinant of property prices. You can take earnings to meet national earnings when costing national house prices, regional earnings for regional house prices, localised earnings for localised house prices. Earnings are the ultimate determinant of how high a price can go. For example, in our latest bubble, we had earnings multiples or in excess of 10 times earnings in the property market. That was an unsustainable situation and we are seeing the normal correction all around us today. The normal earnings multiples for property are between 3 1/2 and four times earnings. This is the long-term trend, but during busts, the multiples often fall down to a lower level than this. If I had to make a guess at what earnings multiple will be at the bottom of the property market, considering the size of the bust I would guess they will be under three times earnings. This would be in line with historical norms during periods like this. It will be exceptional prices don’t correct down to this level.
8. Understand rental yields and how to use them to spot market turns into a properly investment market. In a speculative property bubble, it is often the case that yeilds are chased down to ridiculously low levels in the hope of getting fast capital appreciation on a properly. When you see this behaviour, start selling your property immediately, because a bust it is definitely on its way. The average rental yields in stocks, bonds and property should always be looked at in relation to each other. If a stock is trading at 6% and properties are yielding 2%, either stocks are about to soar or property is about to crash. Either way, your best bet is to get rid of property and to buy stocks.
9. Know your enemy. Estate agents, mortgage brokers, banks and mortgage providers don’t have your best interests at heart. They don’t care whether or not you make money from the property market or are saddled with debt for decades. All they care about is their commission and their fees. You shouldn’t take advice from these biased parties and should instead do your own research based on fundamental analysis of the property market in relation to historical trends.
10. Realise that a house is first and foremost a home. There is no long-term benefit to an economy in having unaffordable housing. It benefits a few speculators but the vast majority of society which simply wants somewhere to live within their means is punished unduly for this speculative frenzy.
