Property..expect the unexpected

November 9, 2019

Wouldn’t it be great to know how our property markets are going to perform this year?

 

However, years as a property investor have taught me not to try too hard to predict our markets year by year but instead to take a long term view, then allow for cycles around this long term trend and be prepared for uncertainty, surprises and the unexpected.

 

The market moves in cycles

 

It’s important to understand that cycles are a continuing feature of the economy and investment markets and anyone who ignores those cyclical swings does so at their peril yet, investors have a tendency to perceive risks as being at their lowest during booms, when the cycle has almost peaked. 

 

That’s because the media is full of stories about amazing profits, television shows on real estate are prolific and friends and family talk of stories with the great gains that have been made.

 

Similarly, many investors believe the risks are highest when the markets are down and prices have dropped and at these times the media tends to report the doom and gloom stories of people losing money and these often sap investors’ confidence.

 

Of course, the reality is that property slumps are often the best time to snap up bargains while prices are cheap, while it’s also more likely that prices will rebound and grow from their low points, whereas there’s not as much room for growth if you buy at historical highs.

 

Why do the cycles keep recurring rather than finding a nice equilibrium

 

Economic cycles exist because we’re human and affected by the optimism or pessimism of others.

 

The world economy is a collection of many nations, each at their own individual point in the economic clock and every nation is made up of millions of people like you and me, each making our own financial decisions in reaction to, or in the expectation of, other people’s decisions.

 

The sheer momentum of all these economies means that they always over-swing the mark and then correct themselves, resulting in cyclical economic movements.

 

In case you’re wondering, “If economic cycles are well understood and the benefits of being a counter-cyclical investor are evident, why doesn’t everyone make a killing?”…the answer is simple; human nature!

 

Waves of optimism and pessimism sweep the community driving investment cycles and the property cycle. Investment markets, being forward-looking, are driven by expectations and sentiment as well as fear and greed and that’s why cycles will always be with us.

 

Interestingly investor sentiment and therefore investment markets tend to “overshoot” the fundamental influences on them – in both directions.

 

During booms property markets get ahead of themselves and grow too fast and they remain flat for longer than needed in slumps and in today’s connected society, with the media feeding us a continual conveyor belt of messages, our mood swings seem wider and the cycle seems shorter.

 

It’s often said that you have to invest through one or two complete property cycles to become a sophisticated investor however, some people just don’t learn from their mistakes and keep getting carried away by their emotions or fears.

 

Then every seven to 10 years or so there is a new generation of investors who have grown up and entered the market.

 

These beginning investors haven’t had the opportunity of learning the lessons of history and tend to drive the next property boom and this ensures the cycle continues.

 

But there’s more to it than that…watch out for the unexpected 'X factors'

 

These X factors are powerful influences on the economy and investment markets that had not generally been expected but which, for a time, have a marked effect on them.

 

They can be from an international source (such as falling oil and commodity prices) or a domestic one (like the uncertainty surrounding the government fiddling with GST or negative gearing.)

 

X factors can be negative; such as the world shock after September 11th or the near melt down of the world banking system in 2008, for reasons that happened on the other side of the globe.

 

At other times they have a positive effect on our economy; such as Australia’s resilience to the Global Financial Crisis because of the demand for our resources from China or the drop in interest rates over the last year when many expected them to rise.

 

These X factors affect the economy at large, which of course affects our property markets but, our property markets also have their own specific X factors – unforeseen events that affect the best laid plans and predictions.

 

The lesson is while it’s important to take a long term view of the economy and our property markets, you also need to allow for uncertainty and surprises by only holding first class assets diversified over a number of property markets and having patience.

 

Understanding the cyclical nature of our property markets, the fact they overshoot and that an X factor can come out of the blue to thwart my best plans makes for a more cautious investor.

 

One of the X factors on the world scene was Brexit and, the election of Donald Trump as president of the USA.

 

One of the X factors in 2015 was APRA’s regulations restricting lending to property investors, causing many to have to review their borrowing capacity in a way they had not foreseen and 2 interest rate drops in the first half of the year when 12 months beforehand economists were predicting rates to rise.

 

Trying to predict the X-factor is futile: if it’s been predicted, it’s not the X-factor but let’s have a look at a list of major past X-Factors.

 

2019: It’s not over yet!

 

2018: The Royal Commission into misconduct in the finance industry opens

 

2017: North Korea escalation

 

2016: Brexit and the election of Donald Trump as president of the USA

 

2015: Falling world-wide oil prices.

 

2011: Continuing problems with European government debt

 

2010: European government debt crisis begins

 

2009: The resilience of our economy despite the GFC

 

2008: The near-meltdown in banking systems economy

 

2006: Major changes to superannuation

 

2004: Sustained hike in oil prices

 

2001: September 11 terrorist attacks

 

1997: Asian financial crisis

 

1991: Sustainable collapse of inflation

 

1990: Iraq invasion of Kuwait

 

1989: Collapse of communism

 

1988: Boom in world economy despite Black Monday

 

1987: Black Monday collapse in shares

 

1986: “Banana Republic” comment by Paul Keating

 

1985: Collapse of $AUD after MX missile crisis

 

1983: Free float of Australian dollar

 

What does all this mean for you

 

If you want to grow your property portfolio in a more difficult environment this year you’ll need to buy the right type of property! 

 

One that has a level of scarcity, meaning they will be in continuous strong demand by owner occupiers (to keep pushing up the value) and tenants (to help subsidise your mortgage); in the right location (one that has outperformed the long term averages), at the right time in the property cycle (that would be now in many states) and for the right price.

 

To become a successful investor you will need to surround yourself with independent and unbiased professional advisors (not sales people) – people who are known, proven and trusted, to help you become financially independent, including how to get the banks to say yes to you.

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