Why Do House Prices Rise And Fall?

Ask an economist or realtor this question and he or she will reel off a long list of economic “fundamentals” like:

• Supply and demand
• Interest rates
• Immigration
• Unemployment
• Economic conditions
• Cost to rebuild
• Availability of land
• Location! Location! Location!

Okay, then, in California between 1988 and 1990 house prices rose 50% in most cities. A similar thing happened in New England two or three years earlier, where prices rose up to 75%. In Australia there was an even more stark example – house prices doubled, almost country wide, in a 12 to 18 month period from the end of 1987.

What “caused” these booms? Was there a sudden drop in supply and a huge increase in demand? No. How far did interest rates fall? They rose! Remember those sky high interest rates in 1989? Was there a sudden massive increase in immigration or fall in unemployment? A shortage of land? A rapid inflation in building costs?

It was none of these things. It never is a change in economic “fundamentals” that causes a boom or bust in house prices, despite what well-meaning economists might tell you via the perhaps not so well-meaning media. You have been dumbed down (conditioned) into believing that the earth is flat when it has always been round. And you never question it.

Think about it: If availability of land had anything to do with house prices, how could real estate values fall 80% in Japan in the decade following 1992 or fall 65% in Hong Kong between 1997 and 2002? Those countries have a genuine “shortage of land.” And if location is the three golden rules of property investment, then why do some of the best properties fall the most in a bust?

There is only one thing that changes whenever there is a boom or bust in house prices. And that is the collective mindset (mood) of the “herd.” Humans are driven by an unconscious urge to herd together and all do the same thing at the same time. That’s why they all panic at the same time. Logic and common sense does not influence your decision to buy or sell real estate. Emotion and impulse does. That’s why you often buy at the top. You buy “because everybody else is making money” and you don’t want to “miss out.” On the way up panic is motivated by greed. Then you sell at the bottom (panic motivated by fear) “in case prices fall further.”

I often say to my readers, when in doubt there is only one simple rule of investment you need to remember – buy when prices are low; sell when prices are high. Yet it is human nature to do the opposite. When house prices are on the bottom and have been nowhere for many years, nobody wants to buy. But once they double in price, everybody wants to buy. I rest my case.

How do you break free from a herd of lemmings that might be rushing toward a cliff to commit mass financial suicide? How can you separate yourself from the pack and avoid the mistakes that most investors make?

The remarkable thing is that human crowd behavior has a pattern to it and you can learn that pattern. We call it the Wave Principle. The bottom line of a new science called socionomics is: mood governs events and not the other way around. Once the penny drops as to what that means, and you learn how to count the waves, it can be like discovering for the first time in your life that Santa Claus is not true.

You have been taught to study the plane. I teach you how to study the pilot.