What difference do property prices make to our Financial Planning decisions?


There is a well-known piece of work by a gentleman called Fred Harrison, that identifies the property cycle as going through a long-term and relentlessly predictable pattern that is known as the 18 year cycle, or sometimes referred to as the 14 + 4 cycle.

It is based on land values going back centuries, and if you see the diagram, you will understand why it is taken seriously by property investors, because it has a remarkable consistency to it.

Founded on this empirical evidence, it is hard to dismiss, ignore or argue with.

The basic pattern is that prices go up for fourteen years and then dip into a recessionary period for four years.

Each new floor that appears is higher than the floor in the previous cycle, supporting the idea that long-term property is a good investment.

If we take this seriously, it appears we are near the beginning of a four year period of downward prices, supported somewhat by the fall last year, suggesting we will see further falls this and the next two.

The level of the fall is unpredictable, but generally a figure of 30% would be typical from high to low.

Government policy, it seems, has no bearing, nor do wider economic factors, although there are some correlations that may exist with economic conditions, which may experience similar types of cycles.

This is a highly speculative and subjective position, albeit based on an objective study. In other words, we should not rely on this.

What may be a more relevant question to pose is how would a sustained fall in property prices impact what we do within our own personalised financial planning?

The answer to that question, is “it depends!”

There is a tension at all times between staying the course within the plans we construct, allowing for the inevitable ups and downs in asset values, and being flexible to change, if new information or circumstances arise.

This tension is complicated because you have to factor in your own situation, and changes that occur within these, with your employment, health etc and the changes in the macroeconomic and geopolitical situations are separate.

This is where the science of behavioural finance locks in, because we need to learn how to behave!

Many studies have been conducted into human traits, especially around biases.

We are all tuned to react in certain ways to certain things, based on our individual personal characteristics.

In this case, the psychological impact of property price falls could be more important than any practical aspect. Investors can overreact, and can make hasty decisions, or allow the ‘negativity’ to influence other areas of their decision making.

Assets, such as property, shares, bonds and commodities will have price fluctuations, it is part of the normal pattern and should be expected. In a strange way, almost welcomed as it is a demonstration of the market working normally.

If we behave as if it is abnormal, then we can go off course.

Financial planning is as much about the “us” as it is about the numbers.

If property prices do, indeed, go into a downward spiral, then we need to zone out somewhat and ask what the consequence is to our plans, based on our objectives.

The act of consistently reviewing is not just to run the numbers, but to check we are comfortable with our plans, to reignite our goals, and to discuss possibilities, both in light of the updated information, but also our (hopefully) progressive thinking.

This part of the financial planning process is ephemeral, as it reflects the changes in us as much as the ones in the outer world. This is as crucial an aspect of great financial planning, as any other. Because it is the “us” that is important, not the notional value of a piece of land.

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