Apologies to those of you who opened this named blog this morning. I did check it as soon as I uploaded it and found a nine minute blog had been got at and now lasted one minute. God knows what happened. I tried an edit, but in the end had to delete the post and start again.
Let’s have a look at the basic parameters you can use to work out where you are in the housing cycle, and where that cycle is going. In other words, what metrics are important, and how can they tell you which way the wind is blowing when it comes to analysing real estate?
Let’s start by looking at the basic structure of the property market. After all, to get this right we have to go back to basics.
People need shelter so they have to live somewhere. There are really only two markets that cater for this, buying and renting.
In order to buy you need a better financial profile. In other words you are constrained by the money you have available either to buy a property outright, or pay on the never-never. In short, the whole groundwork for buying real estate hinges on the availability of finance.
I have worked with various real estate think tanks. They carry out all kinds of surveys to gather a whole raft of utterly pointless information, and then grade that information, and come up with a totally spurious figure to gauge where the property market is heading. The ones I used to follow over the course of about forty years never once forecast the market direction correctly. Apparently no-one but me has suggested they re-think the categories they should be following.
I could go through all the pointless metrics, but let me just give an example of one particularly stupid one. All the think tanks measure the number of people who want to buy a house, and those who intend to buy a house in the near future. What earthly use is such a metric? It tells you nothing. If someone wants to buy a house, so what? The real question is: Do such people have the money to enable them to buy? If you add to your positive list of reasons for the housing market to rise the fact that Fred Blogs wants to buy a house, that is of no use to one’s stats if he cant buy one because he doesn’t have the money.
There are a lot of people who want to buy a house, but as the old saying goes: The way to hell is paved with good intentions. So let’s not go down that particular route. Instead, let us look at the metrics which do matter.
We have already mentioned that no-one can buy a house without money, so perhaps the best place to start our study is with the various metrics surrounding incomes, bank balances, and the economic stability of a country.
You would then look at the various important metrics surrounding a state economy. Such metrics would likely include a state’s unemployment levels, wages, cost of living, inflation rate, and affordability ratios. Such figures should tell us whether people can afford to buy a house, and also show us the condition of a country’s economy. These figures should show one whether there are people out there with sufficient income to cover mortgage payments, and also show whether the economy is looking rosy, or whether it is heading for a recession.
Until we understand the state of money within a country, there is no point in continuing. However, there are secondary matters which need to be taken into account before anyone should decide to go out and buy.
Okay. We know what we have to do. Let’s start the process.
We are going to look at a few basic tables containing information which will tell us as much as we need to know about money, who’s getting it, and whether they have enough to buy a house.
Very few people will have the money to buy a house outright, so we need to concentrate on those who dont have the wherewithal, but who are relying on a bank or mortgage company to buy the house for them. I would also want to know where we are in the housing market boom and bust cycle, and where we are in the country’s economic cycle, and whether there are any unusual events on the horizon which could trigger change.
That does sound as if there is quite some task ahead of us, but it is all doable. At this stage I would make a list of all the parameters I need in order to make any useful decision as to whether to buy, sell, or stay out of the market. Here is my list:
First the indicators over which we have no control:
Central Bank interest rate
Country’s Debt to GDP ratio
Inflation rate
Various indicators showing whether the economy looks strong going forward
The Housing Affordability Index (This was invented by me while I was still at college)
The Rent/Purchase-Price Index; which is also something I invented decades ago
The Auction Index; another index which I invented and used to mail out to subscribers
Then there are the indicators over which we do have some control
Personal income
Personal wealth/assets
Next week I will go through the lists above, and show you where I am finding these readings, how I am interpreting them, and what their current values are.
When is a Good Time to Buy a House