Property trends are predictable
The great thing about property is that it moves in very clearly defined cycles. So if you are holding property then it will shoot up, sit stagnant, and then shoot up again.
If you are buying, selling or remortgaging then it will shoot up, overshoot the mark, slight correction then slow, steady growth and fall off the face of the earth and shoot up again.
This represents 1 ½ cycles so the second time we say it shoots up it is actually a totally new cycle but it assists our understanding if we look at 1 ½ cycles.
Interestingly, most people will draw a clock face to explain the property cycle but the problem with this is that it’s difficult to apply timings to the cycle. So the time it takes to go from 12 o’clock to 3 o’clock may not be the same as the time it take to go from 3 o’clock to 6 o’clock. That’s why I find it much easier and much more accurate to draw a graph.
The strategy for each stage
Now the important thing to understand about the property cycle is the strategy that you must apply to each phase of the cycle. The first thing we do is draw in two stop signs at either ends of the growth or galloping cycles. These stop signs remind us that the massive capital growth won’t go on forever and that if we want to hold our portfolio through any stagnant or falling period or more importantly through times of high interest rates we will need to STOP and review
our portfolio’s requirements. The simple reason we STOP and assess before the boom has slowed is so that we can create an equity buffer that will see our portfolio through.
Where your exact STOP sign will be placed with depend on your situation, the more capital and cash you have available the longer you can leave it, if you have a fixed income and not a lot of capital then your STOP sign will be much sooner in the cycle.
Now the time between property prices shooting up after the falls and the stop sign we apply is one simple strategy. It’s called Buy, Remortage, Buy, Remortgage, Buy and you can do it almost disregarding cash flow totally. Your properties will be increasing in value so much that you can buy as much as you want, once it has increased you can remortgage and buy more. Now cash flow never really gets neglected totally but it is less an issue than other parts of the cycle.
Two dynamics of property: cash flow and capital.
You see there are two very important dynamics that affect your portfolio and managing them is essential if you are to grow your portfolio whilst remaining safe and secure. Disregarding capital and it will mean you won’t be able to buy more property, disregarding cash flow and you could lose your entire investment property portfolio.
In the boom time, the amount of capital you have will determine how much property you can buy, in the stagnant market the amount of cash flow you have will see you through the period safely.
Now, sometime after the whole economy takes off and prices shoot up the Bank of England will come under increasing pressure to raise interest rates to bring inflation and prices under control. So around the STOP sign, you will typically have rising interest rates. So cash flow becomes much more the priority.
The concept of lag
Now imagine a supertanker travelling along at full speed. The captain says ‘FULL STOP’; How long will the fully laden tanker come to a full stop. Kilometres won’t it, because of the momentum. This is a similar concept to the concept of LAG in the economic cycle.
So raising interest rates has the same effect as stopping a boat, the decision to raise interest rates or stop the boat will have a lag effect for the next 2 weeks, 2 months and 2 years even.
Now at some point along the phase, these interest rate rises will take effect and many times the economy and property market will fall off the face of the earth. There will be different names for this point every time; the oil crisis, the credit crunch, the savings and loans scandal, the dot-com bubble but in every case there is a date and name for it. Now it doesn’t mean that every time there will be house price drops and a property bubble bursting.
The important point to remember while everyone is losing their heads is that because the economy will be slowing down interest rates will be trending downwards which will ease cash flow with every drop. As the interest rates drop its time to reset your cash flow and ensure
that you restock any provision account monies that need to be put aside.
Where are we now
In this whole cycle is that it is impossible to pick a specific date on the cycle. As they say in the joke: ‘If you ask 3 economists you’ll end up with 4 answers’. We can, however, track the trends within the cycle and by tracking trends we can easily choose the right strategy to apply
in every market and therefore make money in any market, even when prices are dropping. It’s this reason that we say the best time to buy property is now. If you understand the property cycle you will understand how to do this.
Your strategy from here
The property cycle is possibly the most overlooked aspect of building a portfolio. Far too many property experts and investment companies overlook it totally. This is extremely irresponsible especially considering that you will most likely be holding your property through the various stages of the property cycle. Applying the most appropriate strategy for each stage of the property cycle and making sure that you take advantage of the opportunities as well as avoiding the dangers.
Experts play with figures
So here is my opinion. I’ll leave it to you to agree. I read property expert opinions on property all the time to challenge my thinking and hone my own skills at deciding the market. Sometimes they add value in parts, others I entirely agree with, many I totally disagree with and then others appear to have self-serving intentions but the important thing is many experts have baggage attached, they work for organisations who don’t make money from property so it’s in their interest to promote a negative view of property.
I have to make up my own mind who to listen to and follow and more importantly, take responsibility for these decisions. No one else is to blame when I am wrong. Be warned that if you choose to listen to my predictions or any guru, author, consultant, family member, politician, whoever… and if you make a decision based on their advice and it turns out they got it
wrong they are not going to pay your mortgage.
Experts don’t understand your specific situation and therefore their advice might be totally correct for everyone else but in your circumstances, it could lead to disaster.
No Decisions, No Responsibility
I work on the principle of ‘No Decisions, No Responsibility’ which means I will NOT make any decisions for you and I won’t accept any responsibility for your decisions, even if they were based on my wrong predictions. It may sound harsh but it has to be that way and you should approach every situation in this way. It empowers you but it also makes you the only person to blame…full stop.
In my own portfolio, I have had to face these decisions and consequences many times over the past two decades but I probably wouldn’t be in the situation I am, if I blindly listened to the people who have offered me ‘can't-lose’ opportunities. Ha… can’t lose, or even guarantees, I have seen more of this fall over than the non-guaranteed, non-certain deals.
So go in with eyes wide open and ensure you don’t get caught up in the hype and BS of a sales pitch or a self-interested guru/expert that works for, or on behalf of, property companies and so its in their interests to promote a positive view of property and downplay the negative. I always try and work out where the expert sits when accepting their predictions.
Most experts are wrong most of the time but that leaves a void in our knowledge and this is where my Property Trend Cycle steps in to fill the void.
