Those of us interested in the Australian property markets have seen it all over the past 12 months.
2019 started with significant negative sentiment with the Sydney and Melbourne housing markets continuing their slump causing the property pessimists to predict real estate Armageddon.
Concerns about the Haynes Royal Commission into Banking caused tighter lending restrictions, and all those fears of the possible fallout of a change of government with possible changes to negative gearing and capital gains tax.
But all those things we worried about didn’t occur – did they?
The fact is, it’s really been a year of two halves with much more positive property news over the last few months.
So here are 11 lessons can we learn from the past year to make us more successful property investors.
Lesson 1: Beware of doomsayers
As long as I have been investing, I remember hearing excuses why property prices will stop rising, or even worse, why property values will plummet.
However, in that time, well-located properties have doubled in value every ten years or so.
Fear is a very powerful emotion and one that the media use to grab our attention.
Sadly some people miss out on the opportunity to develop their own financial independence because they listen to the messages of those who want to deflate the financial dreams of their fellow Australians.
Lesson 2. The economy and our property markets move in cycles
The main cause behind these cycles is that we’re human and tend to share the general optimism or pessimism of others creating booms and busts.
It’s a common fallacy that Australian property cycles last seven to 10 years.
Cycles vary in length and are affected by a myriad of social and economic factors. And then, at times, the government lengthens or shortens the cycle by changing economic policies and particularly by manipulating interest rates.
For example, the previous property cycle, which ended in mid 2017, was prolonged by a lengthy period of falling interest rates.
And then it came to an end as APRA tightened the screws on lending, particularly to investors.
More from Michael Yardney: Are those wild forecasts for property in 2020 realistic?
Lesson 3: Investment markets often overshoot
That is, they move by more than changes in the fundamental influences would seem to require – both on the upside as well as the downside.
Take the Sydney property market which experienced significant growth, overshooting its fundamentals during the previous property cycle.
Then dwelling values in Sydney dropped 15 per cent from their market peak overshooting on the downside, when in general all the fundamentals for Sydney property were sound in 2018 and 2019.
Lesson 4: The market is usually wrong about the stage of the cycle
“Crowd psychology” influences people’s investment decisions, often to their detriment.
Investors tend to be most optimistic near the peak of the cycle, at a time when they should be the most cautious and they’re the most pessimistic when all the doom and gloom is in the media near the bottom of the cycle, when there is the least downside – like earlier this year.
Market sentiment is one of the key drivers of property cycles and one of the reasons why our markets overreact, overshooting the mark during booms and getting too depressed during slumps.
More from Michael Yardney: 4 things property investors need to know about the market
Remember that each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.
Lesson 5: There is not one property market
While many people generalise about “the property market”, there are many submarkets around Australia.
The fact is, each state is at a different stage of its own property cycle and within each state the markets are segmented by geography, price points and type of property.
For example, the top end of the market will perform differently to the new home buyer’s market or the investor segment or the median priced established property sector.
And while there is an oversupply of poor quality high rise and off-the-plan apartments in Sydney, Brisbane and Melbourne, there are more buyers looking for well located homes than there are good properties on the market in our middle ring suburbs.
Lesson 6: Property investment is a game of finance with some houses thrown in the middle
While many beginners believe that finance is all about interest rates or fees, there’s much, much more to it than that.
Strategic investors don’t only use finance to buy properties.
They use finance to buy themselves time to ride through the ups and downs of the property cycle by having a rainy-day buffer in a line of credit or an offset account.
Lesson 7: Take a long-term perspective
It is well documented that delayed gratification leads to a better financial position and a better lifestyle in general.
Warren Buffet put it well when he said “Wealth is the transfer of money form the inpatient to the patient.”
Property investing has always been a long-term game, and the longer your time frame and the better the quality of the asset you own the less important timing of the market becomes.
Lesson 8: Property is a high growth low yield investment
While the argument about capital growth or cash flow investing will rage forever, sophisticated investors know the only way to eventually become financially free through property is to build a substantial asset base.
Sure cash flow is necessary – it helps pay the mortgage and keeps you in the game – but capital growth (having a substantial asset base) is the only way out of the rate race.
Savvy investors recognise there are three stages to their investment journey:
The asset growth stage: This is why they need to own properties that grow at wealth producing rates of return;
The transition stage: When they slowly lower their loan to value ratio; and
The stage where they live off their cash machine: The asset base of sound investment grade properties they’ve built over the years.
Lesson 9: Demographics hold the key
Over the long-term, demographics – how many of us there are, how we live, where we want to live and what we can afford to live in – will be more important in shaping our property markets than the short-term ups and downs of interest rates, consumer confidence and government meddling.
Today there are more one and two people households. We are getting married later, divorcing more often and living longer.
And many of migrants coming to Australia are happy to live in apartments.
This means more of us are looking for secure, medium density apartments and townhouses which will become the preferred style of living for as we swap our back yards for balconies and courtyards.
Lesson 10: High-rise apartments carry a higher level of risk
We’ve seen an oversupply of newly built high rise apartment towers in many of our cities.
The problem is, not all apartments are the same.
Some will make great investments increasing substantially in value over the long term, but many of the high-rise towers built in the last fifteen years will continue to underperform with poor, if any, capital growth in the foreseeable future.
Of course, these Lego Land apartment blocks never made good investments.
They offered little scarcity and had no owner occupier appeal having been built with investors in mind, and often overseas investors who didn’t fully understand the needs of the local market.
Worse still, because of the high developer margins and marketing costs, many investors paid too much to start with and have since found that on completion their properties were worth considerably less than their contract price.
The sad reality for these investors is that today, in light of the many media reports of structural problems in some of these high rise towers, there is a crisis of confidence with apartment owners concerned about what unknown issues and liabilities may lie ahead for them and potential purchasers are holding back not wanting to buy themselves futures problems.
This sector of the property market has lost the trust of the buying public and confidence will take quite some time to restore as various stakeholders including state and local governments as well as the construction industry including building surveyors and certifiers scramble to shore up building sector.
Lesson 11: Allow for the ‘X factor’
When most Australians hear about ‘the X factor’, they think about a talent show on TV.
However, economists refer to ‘the X factor’ when an unforeseen event or situation blows all their carefully laid forecasts away.
These X-factors can be negative (the aftermath of the Global Financial Crisis of 2008) or positive (the China driven resources boom of 2010-12) and it can be local or from abroad (the US subprime mortgage crisis of 2008.)
The big X factor for 2019 was the “miracle” election win of the Morrison government.
It wasn’t that long ago that many commentators were forecasting a prolonged property slump assuming the Labor Party would win the Australian federal election.
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 like APRA’s unprecedented restriction of bank lending to investors.
Trying to predict the X-factor is futile: if it’s been predicted, it’s not the X-factor.
So 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.
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