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10 lessons I learnt from past property downturns

What goes up must come down. Source: Getty Images

What comes up must come down.

History shows us that property markets move through a cycle of downturn, stabilisation, upturn and boom. Then, rinse and repeat.

Australia’s property markets have now moved into the downturn phase. But let’s be clear…we’re experiencing a soft landing. There is no crash ahead.

So what’s ahead for property in 2019 and beyond?

Given there are a number of markets across the country, all at differing points of their own cycles, I’d like to look back and share 10 lessons I learned from previous property downturns.

1. Booms don’t last forever

Whether it’s property, shares or bitcoins –  booms just don’t last forever. The thing is, booms are just one part of a cycle, so they will always end at some point.

Every boom sets us up for the next downturn, just as every flat period provides opportunities to get set for the next upturn.

The trick is to be prepared for the downturn when it comes and be ready to make the most of softer market conditions.

2. Stick to your strategy

Don’t change your long term strategy because of short term factors. Look for what’s always worked, rather than what’s working now.

Long term wealth will be created by capital growth of your property portfolio.

Sure, cash flow is important – it will keep you in the game. But it’s capital growth that will get you out of the rat race.

Let’s be honest, almost anyone could have made money during the recent boom years as the market covered up any mistakes. 

But as Warren Buffet says: “You only find out who is swimming naked when the tide goes out.”

In other words, if you’re not following a strategy that works in all market conditions you will be caught naked when the market changes.

3. Get rich quick = get poor quick

Successful property investment takes time.

Be wary because there’s a new breed of spruiker out there looking to lure the uneducated into parting with their money by offering them a short cut to riches.

4. Take a long-term perspective

During a market downturn, fear starts to rear its head.

People who have made poor investment decisions, or those who bought near the market peak, start to panic.

Let’s face it: emotions of any kind are not a good idea when investing.

The secret is to keep your eye on the long term horizon and not worry about any short-term vagaries of the market, because they will pass.

5. Property investment is a game of finance with some houses thrown in the middle

Strategic investors don’t only buy real estate – they buy themselves time by having the correct finance structures in place including cash flow buffers to ride through the cycle.

6. Invest in locations with a future, not a past.

Since the bulk of your property’s performance will be determined by its location, rather than looking for somewhere cheap to buy, find a location where local economic growth will lead to jobs growth, wages growth and population growth.

A suburb where the local demographic can afford to and will be willing to pay for their properties because they earn high disposable incomes.

You’ll find that the rollercoaster ride will not be as dramatic in these well researched locations.

Last time round many of the boom time hotspots which did not have underlying economic strength left investors gasping for air during the downturn.

Yet those who bought in locations based on economic fundamentals and research may not have had as dramatic of an upswing during the boom, but their downside was minimised during the downturn.

7. You know less than you think you know

A healthy ego can be a good signal of future success. However, an over-inflated one will usually mean you end up worse off than when you started.

If you’re the smartest person in your team you’re in trouble, so recognise that mentors and experts can help teach you the things that you don’t even know that you don’t know.

8. Don’t mistake money for wealth

A big bank balance means someone’s rich, right?  Well, no, it doesn’t.

Many high income earners live from one pay to another – and never have enough money “left over” to invest in income-producing assets.

The truly wealthy not only have a capital growth portfolio behind them, they have learned that money is not wealth.

That’s why they make time for their family and their health, and they give back to society and to their local communities, because that is where true happiness lies.

9. The sky isn’t falling

When the good times seemingly turn bad the property pessimists and doomsayers come to the fore.

These “commentators” predict the end of the financial world suggesting we should all sell up and hide under a rock.

On the other hand, sophisticated investors ignore the white noise because they are concentrating on the long-term, where the view is calm and clear. 

10. Opportunity is knocking

When opportunity arises, strike.

Remember Warren Buffet’s words: “Be fearful when others are greedy and greedy when others are fearful.”

Sure it’s difficult to take action when others around you are talking doom and gloom, but it is during downturns that life time wealth is made.

The Bottom Line:

Strategic investors don’t really care too much about market phases. Instead they concentrate on growing their portfolios and investing in the right type of properties, whenever it suits their finance, their strategy and their long-term goals.

That way, when everyone else has hunkered down for the “property winter”, they’re basking in the sunlight of their future wealth creation.

When there is less demand for something, there is less competition, which should mean lower prices.

While investment grade properties will always attract demand, sometimes when the majority of the market is fearful, you can buy below intrinsic value.

Then, because your property is located in an area that has above average long-term capital growth prospects, and you can add value through renovation, that property will soon be worth much more than you paid…. regardless of the market conditions

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.

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