Why past performance is no guide to the future
by John Lindeman
A racing horse’s “form”, or past performance is often used as a guide to predict its future performance. When it comes to the property market, many experts assure us that it’s the same. But if we actually look at how they use past performance to make their forecasts, we immediately come across a huge contradiction.
Only buy in areas that have stood the test of time
One group of experts claim that we should only buy properties in suburbs that have “stood the test of time”.
They say that their high performance in the past offers us not only the greatest level of security, but the best prospects of continued price growth into the future. This is based purely on the expectation that high past performance predicts future performance.
Seems logical, except that there are many suburbs and towns where housing markets have boomed for years, only to crash without warning. In fact, every boom has ended at some time, even if prices haven’t crashed. The expectation that growth will continue in the future in some suburbs purely because it has in the past ignores the continual changes in population, purchasing power and affordability that occur in our all housing markets. High past performance is a good result for property owners in such areas, but is no guide to their future performance.
Only buy in areas that are overdue for growth
The other group of “past performance” experts use past performance in the opposite way. They rely on the absence of past performance to pinpoint areas that are “overdue for growth”. They identify suburbs, towns and even cities where prices have not risen for years and then claim that such markets are due for a catch up to those locations where high growth has occurred.
This ignores the fact that demand may have dropped in such areas, or that there have been huge housing developments causing oversupplies and that either or both situations keep prices subdued. We have seen such experts predicting the imminent boom of Brisbane’s housing market every year from 2013 onwards, based purely on the fact that growth hasn’t occurred.
The issue for us is that while both experts use past performance to justify their predictions, one group looks for areas with high past performance to find potential boom markets, while the other searches for areas with little or no past performance to do exactly the same.