The research revolution

Topics: Predicting capital growth, Demand to supply ratio (DSR), How to research, Property investment
Author: Jeremy Sheppard
Date: 15 April 2015

The way we research property locations is changing. New statistics are now available giving investors in the know a significant edge. The list of new stats is likely to explode over the next few years.

The past

Originally there were no vacancy rates. Instead an investor would try to get a "feel" for how long a property might be vacant by examining the rental ads in the local paper. An investor might visit the local realtor for a chat or possibly even drive around in search of "for lease" signs.

The past was subjective, inconsistent and laborious. Now days we simply look up the vacancy rate.

Admittedly, statistics can be quite inaccurate at times. But modern data acquisition and processing techniques are making data more reliable. And in the future it will only get better.

The future involves a lot less driving around in search of "for lease" signs and a lot more looking up statistics.

Can we predict the future?

If we were to toss a coin, nobody knows if it will land heads or tails, right?

The toss of a coin has been used as a simple random input for centuries. It's still used to determine who will kick off first. (However, I've noticed that "paper, scissors, rock" is starting to gain popularity in our increasingly cashless society).

But is the outcome of a coin toss really unpredictable?

What if we had a high speed, high resolution camera aimed at the coin as it was passing through the air? What if we had that camera feeding information into an image processing super-computer? What if we also knew the dimensions of the coin, its elasticity and weight? What if we knew the air speed, direction and density? What if we knew coefficient of dynamic friction for the coin and the floor?

In other words, what if we knew every piece of data affecting that coin's universe, could we predict the outcome? The mathematics would be complex, but not impossible.

A practical and amazing example

Already physicists are using high speed cameras and advanced mathematical modelling to make real world predictions in split seconds. The following video clip was recorded in 2013.

      Amazing quadcopter acrobatics

Raffaello D'Andrea shows how high speed cameras and advanced mathematical algorithms help quadcopters (small remote control drones) to:

  • Fly around balancing a glass of fluid without spilling a drop
  • Adjust their flight path after having some propellers chopped off
  • Play tennis
  • Cooperate together as a team to catch a ball and throw it

Predicting the outcome of a coin toss now seems trivial doesn't it?

What is needed to predict the future?

You can see from the quadcopter video that mathematical modelling of our environment has taken leaps and bounds recently. You can also see that data is being processed much faster and more accurately making for some genuinely practical and reliable uses.

And you can see from the coin toss example that despite our negative preconceived ideas about predicting the future, it is actually quite possible. But in order to do so we need two things:

  1. Maths - an understanding about the nature of the environment we're trying to predict, how things are dependent on one another, affecting the outcome
  2. Data - All the variables that go into the mathematical formulae for each specific instance we're trying to predict
You can see where I'm heading with this...

Can we predict capital growth?

The answer is, "not yet" - at least not perfectly anyway. There are a few problems that need to be overcome.

Firstly, the data is very limited. At the time of writing there are many more stats publicly available to investors than there was just a year or two ago. But even this number is still way too few to accurately predict the future prices of property markets.

Secondly, the maths is overwhelming. Our current understanding of the precise way in which a single variable affects property prices is limited. And incorporating only half a dozen variables makes for some pretty tough calculations.

But you can see that the theory is sound - know as much as you can about a property market and about the drivers of capital growth, and you'll increase the accuracy of your capital growth predictions.

Where are we now?

Property investment research that took days is now possible in minutes. Data that was impossible to come by, or never even imagined, is now only a click away.

The accuracy of the DSR (Demand to Supply Ratio) in picking top property locations has already been proven to some degree...

      Proof the DSR works

As you can see from the above link, the combined effort of some of the top experts in the industry at picking property hot spots is already being challenged, and in some cases, exceeded by relatively simple mathematical modelling like the DSR.

What is coming?

Quadcopters and robots of the future will start to challenge biological athletic performance. Similarly, more and more statistics will be created analysing property markets from even more angles making it harder for humans to outperform the algorithms.

This is a natural progression of the information age. The success of companies like Google and Amazon are an example of this change. The more we move into a cloud-based world, the more diverse the information available and the easier it is to share.

The research revolution

At the time of writing there are 8 statistics incorporated in the calculation of the DSR. The DSR+ however has more than double that. But the current DSR+ is just a sample of the future. A research revolution is coming.

There are already over 30 additional stats on the drawing board at The future is one of science and mathematical modelling. Gone are the days of divining rods used to find water. The days of guessing where capital growth will happen are numbered.

You may be a sceptic, change often experiences resistance. I've had a personal peek of the future and I think this is inevitable. I've also learnt that if you don't embrace change, you end up like the dinosaurs.

Of course I'm biased, but my advice would be to throw off preconceived ideas about predicting the future. Embrace the research revolution and discard old research methods soon to become extinct.

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