I can’t remember exactly how old I was, but at around the age of 8 I started pestering my parents to buy me a bike. “No, there’s no point” they would respond, “You’ll ride it a few times and then you will just go back to kicking footballs into trees and through windows”. “Rubbish” I responded, “of course I will treasure it. Anyway it was a cricket ball that I put through the window and dad drilled a golf ball through the window in his study so I thought it was allowed!” That last comment got me the clip round the ear it so richly deserved, but eventually they relented and bought me a bike. After some wobbles I got going and promptly drove straight into a very thorny rose bush. It took about ten minutes before I was extracted from the bush bleeding and crying as my parents were focussing on their gin and tonics at the time, which, in hindsight, was my first lesson in prioritisation! I didn’t jump back on the bike for about a week.

I have noticed that when it comes to adults and investing very much the same thing occurs. People make an investment and then if it goes horribly wrong the majority are reluctant to invest again for fear of being burnt once more. This is one of the major reasons why amateur investors woefully underperform the market. They buy when everyone else is buying (i.e. when most of the gains have been had), sell near the bottoms and don’t buy back into the market until the major gains have already been had… So for example after the great crashes of 1990 and 2008 most investors were nervous about getting back into the market for several years.

The same is true for the housing market. Indeed the psychological trauma caused by such events actually blinds people to the reality. For example, here are some quotes extracted from the press from 1998 to 2005:

1998 – The Budget – “Mr Brown said: "I will not allow house prices to get out of control and put at risk the sustainability of the future." He said he was determined that the UK should not return to the "instability, speculation and negative equity" of the 1980s and 1990s.” The Daily Telegraph

2000 – “Housing-market experts, from estate agents on the ground to analysts in the high-rise city banks, are agreed on one thing: this is more than the annual summer slowdown. House-price inflation has dropped considerably and, in some pockets of the capital - usually areas on the fringes of more fashionable addresses - where people were paying silly prices for bad houses, properties are indeed worth up to 10 to 15 per cent less than they were six months ago.” The Daily Telegraph

2001 – “The house price indices are for once agreed: prices are slipping as the effects of recession take hold. Suddenly, the telephone-number price-tags of rather ordinary two-bedroom flats are beginning to look ridiculous.” The Daily Telegraph

2002 – “The top of the property market has been in trouble for some time… Property in some outer London boroughs now changes hands at phenomenal multiples of average local earnings - the prices being pushed up by a relatively small number of people driven out of expensive parts of the city. In Bromley, for example, house prices are now 10.4 times local earnings” The Daily Telegraph

2003 – “He [Roger Bootle] said: 'The message is clear. Houses are now so over-valued that a prolonged period of falling prices is on the cards.' … Some London 'hot spots' have already seen prices marked down in recent weeks, which has been attributed to lower City bonuses and Stock Market uncertainties.” The Daily Mail

2005 – “After five years of unstoppable price rises, the housing market has been showing signs of jitters.” BBC

Which just goes to show that you cannot rely on what you read in the press. This was a period of massive house price gains and yet the exact opposite was being reported. But this is the psychology of such times: the majority cannot believe that prices can go higher because the scars of the previous crash are still raw. When prices go up they assume that this is a dead cat bounce.

Indeed many commentators expect prices to go lower because they mistakenly believe that prices “should” have crashed by more and only when prices succumb to this perceived level of fair value, will they buy. As prices keep going up even in the face of bad news, most commentators and people who are not “in the market” decry the increases and become more vociferous. Their negative stance is being proven to be wrong by the market but in their mind they are right.

Meanwhile the people who are driving up the market are mad and will ultimately pay the price in a massive crash. Except the crash takes a lot longer to happen than they expect and prices have left them behind. Unfortunately much of what you read and hear is opinion rather than intelligent analysis. Read the quotes again and you will see what I mean: “Silly prices” and “telephone number price tags”.

Of course these opinions are not completely without foundation. But they rely almost entirely on one or two “key indicators” which apparently show, without question, that the market is insane. The house price to earnings is one of these and UBS came out with a note in November last year predicting a crash in prime London house prices because the ratio is currently above 10. Their opinion piece analysis showed that the property market has crashed when the ratio has been above 10. And they are right, but only partially so. Yes, the property market has crashed when the ratio has been that high.

However, there are far more examples of the ratio being above 10 and the market not crashing. This is true not just in the UK but also America. Indeed just look at the quote above from 2002. House prices were 10.4 times earnings. The market didn’t just tread water and then nosedive.

IT WENT UP DRAMATICALLY FOR ANOTHER 5 YEARS.

This is not a rare exception either. Likewise, in 2003 Roger Bootle, managing director of Capital Economics, formerly chief economist at HSBC and one of the Bank of England's 'wise men' said: “House prices could fall by as much as 30 per cent over the next four years” This is someone to whom we were supposed to listen because he had better information and a surer grip on economics than even the best experts.

But if you had followed his advice you would have missed out on some of the largest house price gains in history. So why do genuinely intelligent people with access to better data than the average Joe consistently get it so wrong? Unfortunately none of the people who comment in the press have studied the history of the London property market in any detail. Which is why the lengths of the trends confound them and then the dramatic shifts surprise them.

But history provides us with very clear indicators that help predict what the market will do. I should point out that I am not an eternal optimist when it comes to Lonndon property as I hope you are already aware. For example, in 2005 I was advising people that the likelihood of a crash in 2007/8 was high because I had studied the works of Fred Harrison and Philip J Anderson amongst others. Indeed in 2007, when the market was literally fuelled by panic buying, I was telling clients that waiting and watching was probably a good idea.

Likewise, you know that I predicted that in 2015 and 2016 the high density new build market (please note this does not include all new developments) would suffer. This was 18 months before any of the banks started making similar predictions, because I use completely different indicators to them (in case you’re interested much of the new build market depends on a different cycle to the traditional London and UK market).

Despite these accurate predictions, I am not always right! Annoying but true: I was too pessimistic between 2009 and 2012 despite the fact that I knew that the market should recover during that period. Unfortunately I was an idiot and let “logic” and the enormity of the crash of 2008 sway me from the evidence of the cycle and the key indicators. Quite simply, I thought the crash was so big that the cycle couldn’t hold. I thought it was different this time. I can now honestly hold my hands up and call myself an idiot for thinking this (which is a much politer version of Serena’s verdict. She lets the kids get away with anything but not me…).

By the way, please ignore anyone who says prices have to go up because demand far outstrips supply. Although we all understand supply and demand, it does not help forecast changes in the market. In 2007 demand far outstripped supply and the market crashed. Trust me it wasn’t because we had suddenly built hundreds of thousands of homes. So that argument does not hold up to scrutiny, however much the estate agents and developers would like it to. It may seem hard to believe but now is actually an excellent time to buy Why am I so positive? Well there are certain indicators that have accurately predicted a crash over a period of centuries. In the UK, the cycle has lasted for over four hundred years and has only failed during the two World Wars. This is information on what will happen in the market which is ignored by mainstream analysts and the press (and me from 2009-2011 – idiot!).

Fortunately this makes the information all the more valuable. At the moment these indicators are looking positive despite the apparently negative backdrop. Here are a few points to consider:

- In 1998 the world looked a scary place. Asian economies were in dire trouble. Russia defaulted on its bonds and Long Term Credit Management run by rocket scientists and Nobel Laureates collapsed. It was thought the western financial system was on the verge of destruction. This was seen as inevitable as markets had recovered too quickly after 1990.

- 2000 – The Dotcom crash wiped billions of the markets. It was the end of the amateur “day trader”. At the time it was seen as proof that the wounds of 1990 had not been healed just covered with a Band-Aid. - 2001 – September 11th . It was thought that the world had changed for ever on that day. But previous cycles and the key indicators showed that the UK and US property markets were unlikely to crash during this period despite the seemingly constant stream of bad news. This was hard for those watching their Bloomberg screens to believe. After all if you are watching a sea of red and billions being wiped off the markets then it is understandable to extrapolate that this must feed into lower property prices in prime central London. Understandable but completely wrong.

If you bought property in 1998-2001 most people would have thought you were mad. However, if you had the chance to buy at those prices now, would you? Of course you would and we are currently in a similar stage of the cycle as 1998, so this is a significant opportunity. This does not mean that you should just go out and buy any property. You must focus on “Best in Breed” that will command the highest premiums in a strong market and still be highly desirable and liquid in weaker markets (it is those people who bought poor or average properties who need to sell who are bearing the brunt of the prices falls at the moment).

McGivern, have you lost the plot? Haven’t you seen that prices have gone through the roof? This is exactly what people were saying in 1998. And I am not suggesting that you will see massive gains immediately in prime central London – the strongest growth will be in the outer boroughs and outside of London. But at the same time you can now buy excellent properties at good prices without paying huge premiums and getting into bidding wars, which is exactly what will happen once buyers find their appetite again. You must ignore all the headlines that you are currently reading.

The quotes from the press at the start of this article are evidence enough; the problem with most of the reporting is that journalists and commentators fail to distinguish between the numerous markets within the London market. I’ll be generous and say this is because they do not have space in their articles to go into any depth. But, headlines and negativity are the easiest way to sell papers. “Property prices to fall 20% in London” has been a fairly common one of late. But if you read the articles you will discover that they are totally focussed on new builds. This is misinformation - new builds are not a proxy for London or the UK. And this is great news for those with the knowledge and resources to take advantage of the misinformation. It allows us to acquire property while prices are fairly subdued due to tax changes and political uncertainty rather than any systemic issues like those we saw in 1990 or 2008. Prices have certainly fallen recently - some areas and price ranges have been more affected than others. But these falls are seen by the majority of commentators as evidence of an imminent collapse instead of a normally functioning market taking into account higher transaction costs.

The increases in Stamp Duty are far from insignificant: On a £10m property the SDLT has increased from £700,000 to £1,113,750. And if it is a second home the total cost is even higher at £1,413,750. Add in the uncertainty with last years’ election, the sheer number of tax increases and the astoundingly inept handling of the EU referendum and it is unsurprising that prices have dropped (note this is only true in certain price brackets and areas of London. Many outer boroughs are up 15-20%). But these drops will prove to be temporary. The market is simply absorbing the changes.

And consider this: The ONS released a study last year that showed in the previous 34 years there were only 7 years in which UK house prices fell and that the biggest drop was 7.6% in 2009. The average annual increase in prices over that period was 6.9% Now there is a serious health warning with these figures. I can show you properties that fell over 30% and more in 2008/2009. Equally there are pockets that will have increased in value considerably more than 6.9% per annum. But let’s use 6.9% as the average. If you buy a property for £10m now and the market increases in PCL at just 6.9% for the next 10 years that property will be worth £19,897,794.86. Of course, there are no guarantees that this will happen but over 400 years of history suggests it will. If you don’t think this will happen, then that is fine, but you need to ask yourself are you basing this on facts or is it just opinion? Have you studied property price movements using clear data spanning centuries or are you just forming a decision based on articles written by journalists who are generalists and have no expertise in the field? Because if you don’t think that the cycle will repeat what you are saying is that “it is different this time” which Sir John Templeton described as “the four most expensive words in investing.” Of course, nothing is guaranteed and a black swan event could happen to negatively affect the market, but the probability of this is far lower than the market repeating the cycle as it has done for over 400 years. By the way don’t worry if you are feeling nervous about the property market. As I said, I basically had the road map of what would happen and I still let my emotions get the better of me in 2009. You don’t want to make the same mistake.

CRASH ALERT

There are all sorts of indicators that people use to predict property crashes and they are almost all misleading. People are especially jittery at the moment despite the fact that the London property market (except for many of the new developments) is on extremely stable ground: 1. The lending we have seen has been rock solid and nothing like the lax practices we saw between 2002 and 2007. 2. Employment is strong in the UK 3. New ways are being invented to monetize property, e.g. AirBnB 4. New business models are evolving to buy property and allow money into the property market that couldn’t previously access it, e.g. crowdfunding 5. Corporation tax will be reduced from 20% to 18%. This will release more money to be invested elsewhere and drive more investment into the UK. This has to drive up land prices. At the moment it is very hard to get a mortgage. If you have applied for one you will know how painful the process is and how much paperwork is required (one reason you should really speak to a good mortgage broker or your private banker before you start looking for a property).

The pendulum has swung from the easy credit of the early to mid 2000’s. Now we have restricted credit despite the fact the banks are desperate to lend. This happens after every major property crash, but the pendulum will swing back to easy credit as it always does. Any incumbent government wants continued economic expansion as this makes the likelihood of being re-elected much higher. Allowing credit to be loosened when the markets seems to be faltering is the default method of doing this. In doing so, they will set the stage for the next boom, which will lead to panic buying in the final parabolic burst of price increases. This will happen just as the consensus in the press and various politicians declare that we have a “goldilocks” or some other fairy tale economy.

As always there will be talk of new paradigms which is just a pompous way of saying “it’s different this time”. That is when you will want to start reviewing your property portfolio in preparation for the next almighty crash (whether it consists of one family home or multiple properties). However, the indicators which start flashing red about 18 months to two years before a crash are not blinking at me and I expect there to be significant price increases before they do. So if you wish to acquire a property in London now is a good time just as 1998 proved to be. Especially if the stock markets have a serious wobble between May and October, which seems likely. However, you must be patient and wait to find the “Best in Breed”. 

Too many buyers expect to find their ideal home or investment within a week or month. But this is how you will make an expensive mistake. There are still far too many overpriced, average properties on the market despite what the estate agents say (remember they are legally obliged to try to achieve the highest price possible for sellers). The fact is that you can never predict when the ideal property will become available but you need to ensure that you are in the right place at the right time to have first refusal. That could be tomorrow or in six months’ time.

As mentioned, history has shown that there have only been 7 years when prices have fallen in the last 34 years. The press is mistakenly reporting massive price falls and predicting an imminent collapse as it has done for the last four years. We have been here before time and time again and the exact opposite has happened. Big crashes are rarely predicted accurately and certainly not by the press or economists which is why the Queen in 2009 asked an audience of economists at The London School of Economics: “Why did nobody see this coming?” It is very hard for a market to crash when everyone is expecting it to do so, because by definition that means an awful lot of money is not in the market (be it property, shares, bonds or classic cars). Correct – Yes. Crash – No.

One final thought: when you buy a property in London, you are in fact buying a share in London PLC. If you think London will continue to be one of the world’s best cities in ten years’ time, then why would you wait to buy?