Will technology change the property cycle and effect house prices?
I could bore you with my views on the election and Brexit but what’s the point?
You can simply turn onto one of the many 24 hour news channels and watch the talking heads drone on incessantly. The last few years have been a boom time for political observers! So, instead, I thought I would look at one of the questions that I am asked a lot – how can the property cycle repeat like clockwork without it being common knowledge? Surely, city analysts and economists know about this?
And coupled with that question is the statement – “With technology and the ease that one can look up data and information, people will have a better understanding of the property market so you can’t get an advantage and future booms and busts are unlikely.”
Good points. Unfortunately, history has proven that despite amazing advances in technology - the invention of the printing press, computers, the internet – humans only have a limited capacity to process information. And the way that we seek out information and then interpret that information is not logical and based far more on our emotions and social conditioning. For example, economic theory nowadays doesn’t assign a great deal of importance to land use – it is regarded as a “factor of production” but of far less importance than capital (e.g. machinery, tools & computers) and labour (e.g. physical effort, knowledge & skills). Brilliantly, this completely ignores the works of David Ricardo and Henry George amongst others who proved in the 19th century that the role of land is actually pivotal. Indeed, Henry George is virtually unheard of, despite being arguably the most important & popular economist of all time – thousands lined the streets when he died. How many people, especially economists, can say that? Meanwhile, conventional wisdom and the media tell us that the world is a disaster. We have political uncertainty, trade wars, poverty, climate change & to add insult to injury, I keep seeing Diane Abbott. But is the world as bad as it seems? Well, in his brilliant book “Factfulness”, Dr Hans Rosling points out: “Our Dramatic Instincts and the Overdramatic Worldview Think about the world. War, violence, natural disasters, man-made disasters, corruption. Things are bad, and it feels like they are getting worse, right? The rich are getting richer and the poor are getting poorer; and the number of poor just keeps increasing; and we will soon run out of resources unless we do something drastic. At least that’s the picture that most Westerners see in the media and carry around in their heads. I call it overdramatic worldview. It’s stressful and misleading. In fact, the vast majority of the world’s population lives somewhere in the middle of the income scale. Perhaps they are not what we think of as middle class, but they are not living in extreme poverty. Their girls go to school, their children get vaccinated, they live in two-child families, and they want to go abroad on holiday, not as refugees. Step-by step, year-by-year, the world is improving. Not on every single measure every single year, but as a rule. Though the world faces huge challenges, we have made tremendous progress. This is the fact-based worldview. It is the overdramatic worldview that draws people to the most dramatic and negative answers to my fact questions. People constantly and intuitively refer to their worldview when thinking, guessing, or learning about the world. So if your worldview is wrong, then you will systematically make wrong guesses. But this overdramatic worldview is not caused simply by out-of-date knowledge, as I once thought. Even people with access to the latest information, get the world wrong.”
Indeed, when he asked a group of Nobel prize winners his 30 questions, they were the amongst the worst-scorers. This proves that even the most intelligent people with access to the best data are poorly informed in areas outside their small field of expertise. Frighteningly, this includes politicians. How do they hope to make good policy decisions if they don’t know the facts? And this happens in all walks of life because each of us only has a certain amount of bandwidth to process the information we are bombarded with.
Do you think the data wasn’t there on Enron, Bernie Madoff and mortgage backed securities? In all three cases it was actually stunningly obvious what was happening if you could be bothered to look at the facts rather than just assume that everyone else had done the due diligence for you. But that is the danger – we assume that because something is well known and part of “convention” that it must be ok. The simple fact is that technology and access to knowledge doesn’t mean that we will use it and, even if we do, there is no guarantee we will use it intelligently. I am sure that you can think of lots of examples too. So, how likely is it that technology will change the property cycle this time? Indeed, fintech is more likely to reinforce the cycle because it will allow more credit into the system which will help fuel the next boom. It will then all crash because it is a cycle of boom and bust, but prices will be considerably higher – double where they are today in my view – by the time we have the next bust. And the price increases will dwarf the falls in the crash. This has been happening for centuries and it will not change, just as I can guarantee there will be other scandals like Madoff revealed in the next bust (by the way the numbers get bigger because it is much easier to print more money than it is to create more land). Quite simply, technology and information won’t change human nature. Fear and greed will trump logical thinking for centuries to come. Of course, this doesn’t mean I’m saying that technology and the access we have to information is useless. For example, the speed at which scientists can assemble data and simulate tests to make medical breakthroughs is breath-taking. And on a marginally less important note, I have just used google to find out how to make espresso martinis for my birthday celebrations tomorrow. Wonderful!
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