Before the deflationary crisis hit two years ago, the UK real estate market had been one of the world's hottest. Prices fell hard over the past year, but -- good news! A new report by Halifax, the UK agency that compiles the closely-watched Halifax House Price Index, shows that "prices unexpectedly jumped in May by the most since 2002, adding to signs the worst of the recession is over." (Bloomberg.com)
Real estate prices in the UK are still some 16% below this time last year, yet May saw an unexpected 2.6% jump. "Unexpected" is a key word here. "Economists," says Bloomberg.com, "predicted a 1 percent drop, according to the median of 12 forecasts in a Bloomberg News survey." But could nothing have predicted the May rally?
That depends on how you go about your forecasting. Conventional economists more often than not simply extrapolate previous trends into the future. "UK house prices have been falling, so they should fall some more," was probably the reasoning of the surveyed economists. Of course, that's like trying to drive a car looking through the back window; no wonder economists get "surprised" so often.
Elliott wave analysis, on the other hand, is a forward-looking method -- which offers you a distinct advantage. Don't get me wrong, Elliott is no crystal ball. BUT -- through our research here at Elliott Wave International, we've established that the stock market and real estate usually move together, because what moves them is the same collective mood of investors.
What's more, historical chart comparison demonstrates convincingly that real estate usually follows the stock market. Does this correlation also check out in recent history? See for yourself. Here is a table showing the UK's Halifax House Price Index going back to May 2008 (framed in red; source: Lloydsbankinggroup.com).
Below, I plotted these index readings on a chart of Britain's main stock index, the FTSE-100, going back to June 2008 -- and then highlighted the trend in red:
After looking at this chart, can anyone really say that the May jump in UK's house prices was unexpected?
When you put social mood first, the financial markets start to lose their "mystery," "randomness" and "unpredictability." That's the real power of Elliott wave analysis. To find out where European stocks are likely headed next, read the June issue of our European Financial Forecast.