Whether with stocks or real estate, all predictions have a limited sell-by date
In 2016, investors saw the unexpected crop up in many situations as long-held beliefs — and analysis — bowed down to the weight of evidence. This highlights not only the dangers of confirmation and hindsight bias but also the damage that accrues when investment decisions are not re-calibrated to account for emerging trends.
The year began with US and global equity markets falling out of bed with corrections of greater than 10 per cent in January alone. Pundits talked about further brutal corrections, and a “new age of turbulence” for equity prices would reverberate throughout the economy.
Surely enough, equity markets soon reversed course and ended the year with double-digit gains. The oil price swoon that sparked the equity sell-offs in the first place led pundits to proclaim a new era of oil prices possibly approaching $10 (Dh36) per barrel and staying there. Predictably, oil prices have doubled from their lows within a span of months. When Brexit occurred, analysts swooped in with Cassandra-like calls on the devastating impact that it would have on the UK real estate market. Only a short six months later, pundits are baffled, with The Economist magazine now explaining why prices have actually risen.
Finally, as negative interest rates proliferated during the first half of 2016, economists and central bankers worried about their permanence and their inability to defeat deflation. The US 10-year treasury rates went to a low of 1.37 per cent in June, and since then have doubled as prospects of an expansionary fiscal policy finally entered the zeitgeist after Donald Trump’s victory (yet another outcome that was considered unthinkable).
In Dubai, amid prognostications of doom and gloom, analysts mostly missed out on the trend for affordable housing and the latent demand that started to result in price gains in the last quarter of the year, a fact that has only now started to be begrudgingly accepted.
These trends highlight not only the confirmation bias — that which drives us to seek and favour evidence that confirms our pre-existing beliefs — but also hindsight bias, the fact that after the fact we claim that we knew the outcome all along.
These twin forces are the Armageddon for investors. Accordingly, it is worth glancing through the trends to look out for this year that might force a continued recalibration:
Foreign investment flows
Money flows from international investors (especially China) will continue to increase. It is the nature of these flows that is triggering a recalibration of supply (along with end user demand) towards the mid-income space as the trophy end of the spectrum remains somewhat oversupplied.
Typically, supply tends to lag demand around infection points by around two to three years. Until such time, it is likely that prices at the mid-end of the spectrum will continue to rise at a modest pace. This is already being reflected by the rising price of land in these areas.
Interest rates and lending
With the Federal Reserve having increased interest rates for a second time since 2016, there are concerns that borrowing ability will get hindered as interest costs rise. This is especially true now that mortgage transactions account for half of overall activity in 2016, and expected to rise further.
While loan activity needs to be closely monitored, it is imperative to note that lending remains healthy thus far (unlike the 2009-11 period). Furthermore, interest rates are still at historically low levels and unlikely to rise at a rapid pace.
The continued rise of mid-income developments
With end user demand having finally asserted itself, and investment flows following suit, expect a continued proliferation of choices for this market segment as developers recalibrate and compete on price and quality (along with post-handover payment plans).
Expect analyst wringing about oversupply at this end of the spectrum. However, it is unlikely that this situation develops anytime in the coming year or two.
There is a critical difference between recognising the way things are and the way they ought to be. It is a simple maxim.
Yet it is astonishing that year after year, investors fall for the bait, repeatedly convincing themselves of the inevitable truth of their forecasts, ignoring all evidence to the contrary. Rational investment allocation is about recognising the way the world is.
It is this critical recognition that often separates the successful investor from the average one.
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