MONEY COMMENT
Crowd Behaviour And The Housing Market

By Jane Mack (TMFJane)
May 13, 2004

The other day I came across a rather bizarre news story that involved a double-decker barge capsizing in the middle of a lake in Texas. It was caused by the passengers who had all suddenly rushed to one side of the boat to take a look at some nudists frolicking on the beach.

The story sprang to mind when someone asked me what I genuinely thought was going to happen to the housing market over the next couple of years.

Will house prices continue to rise? Will there be a general slowdown and, if so, when? If the market slows down will prices stagnate? Or, the biggest topic of conversation around dinner tables these days, will there actually be a market crash, as a result of lemming-like behaviour?

I haven't got a clue what the answer is but the only thing that really matters is how will each scenario directly affect you in your own current circumstances?

For example, did you know that, according to the Council of Mortgage Lenders, owner-occupiers (whether owning outright or buying with a mortgage) tend to stay in their home for an average of 15 years, 5 years more than a renter?

It stands to reason that the frequent movers are younger people who are moving up the housing ladder (the under-35s average 3 years) but there are clearly a large number of homeowners above that age who are happy to stay put for many years. As long as they can afford the mortgage and don't have to move, a future crash would have little effect in reality as they could sit it out.

Look at these latest statistics for England for the year 2002-3 from the Survey of English Housing (Excel file) published by the Office of the Deputy Prime Minister:

And now look at how the land lay back in 1988 just before the last market crash:

You'd think the statistics would change quite a bit for owner occupiers between 1988 and 2003 - from the peak of the housing market, right the way through the crash and throughout the subsequent surge in prices afterwards - but in fact they hardly vary at all.

I suppose you could argue that the reason people stayed in their homes for an average of 15 years was because they were stuck throughout the crash and that's possibly a valid point to consider. But it does show that 'Plus ça change, plus c'est la même chose'.

My point is two-fold: Regardless of what happens in the housing market, the statistics show that things haven't changed much since the last surge in house prices. And, secondly, beware of following the crowd - think independently and tailor your decisions in accordance with your own particular circumstances.

Although I know that my crystal ball is about as much use as a chocolate teapot, I am well aware that, to a large extent, what happens to the housing market will boil down to crowd behaviour. The pundits like to call it 'Market Sentiment'  - what they really mean is the extent to which we act like a bunch of lemmings. Which is exactly what those people in Texas did when they followed the crowd and capsized their boat.

Find out more about Homeowning.