History is important. If you have looked at how markets have behaved in the past, you will not be surprised when the market makes a sudden up move or comes crashing down. A study of market cycles over the years would give one a fighting chance of recognising when prices have become absurdly expensive and risky or when they have become too low and cheap. As William Bernstein, neurosurgeon and author of several books on investing including The Four Pillars of Investing puts it, “A physician, physicist or chemist who is unaware of their disciplines history does not suffer greatly for the lack of thereof but an investor who is unaware of financial history is irretrievably handicapped.” Financial history provides an additional dimension of expertise. History tells us about the short term and long term behaviour of various financial assets. Sometimes even the best prepared can fail, but if you are unprepared you are sure to fail.
A hard belief of Indian savers is that real estate prices never come down in India. While this may be anecdotally true, what does history say in this regard? How has property prices behaved in India? In India, unfortunately, there is no detailed history of real estate prices. The National Housing Board (NHB) launched the NHB-RESIDEX index only in 2007. The index is updated on a quarterly basis and cover 35 cities. Not only are there problems with the reliability of the data, but the data itself covers just five years and this may not be enough to establish a pattern.
Many central banks and policy makers have now started to analyse and develop housing indices since these asset form a large part of household wealth. Analysing historical data is exactly how economists Karl Case and Robert Shiller were able to successfully predict the housing bubble. While working on studying home price trends, Karl and Robert along with another economist Allan Weiss developed the repeat-sales index using data of prices of houses that they had obtained from across the country. The index collected data of repeat sales of single family homes on a national and a regional basis. By using this index data they were able to establish a pattern in housing prices through the year.
The Case-Shiller index was successfully used to predict a US housing bubble that would peak in the second quarter of 2006. There are multiple Case–Shiller home price indices: a national home price index, a 20-city composite index, a 10-city composite index, and 20 individual metro area indices. In India it would help is there is a better quality of house prices index going back decades. This is not hard to do. After all, property registration office has all the data we need. Until we have historical data, however, investing in property will remain a game of luck and not skill.
