The evidence is overwhelming that we know much less than we think we do about property markets, even when we’re armed with all the data and reports.
Sometimes that’s especially when we’re armed with data and reports, because it gives us a false sense of confidence.
Just look at some of the headlines that have come out so far this year:
- “The Sydney property market is falling” – reported last week.
- “Sydney property prices rising” – reported this week.
- “The property boom is at an end” – reported every week.
- “Here are the hot spots for 2016” – I get an email like this almost every day!
The problem is investors tend to read and believe what they want to – it’s called confirmation bias.
This is the psychological phenomenon that explains how people tend to seek out information that confirms their existing opinions and overlook or ignore information that refutes their beliefs.
Confirmation bias can thus cause investors to make poor decisions and explains why markets don’t always behave rationally, as it is a source of investor overconfidence.
So let’s step back from all the hype and look at what really happened over the last year and see if we can extract some lessons for 2016.
Firstly, here are the latest figures from CoreLogic:
The markets are fragmented
What these figures don’t really show is how fragmented the markets really are.
Even though our property markets lost their oomph as last year progressed, some properties are still selling well and increasing in value while others aren’t.
For example, what I call “investment grade properties” in the middle price range (say $500,000 – $850,000) in prime locations and with an element of scarcity, are still selling well, even though there is clearly less interest from both owner occupiers and investors than there was before.
However, “B” & “C” class properties are not selling well. Some have dropped in value by up to 10% and some can’t be given away (well…it’s not really as bad as that, but you’d have to give a very steep discount for someone to buy them).
While the market has only just begun to be tested this year, the key indicators suggest this slow down will continue well into 2016.
Five property lessons for 2016
So to ensure you don’t get burned in the coming year and to give you a chance to make the most out of our changing property markets, I would like to share some important lessons I’ve learned from previous cycles.
Probably the most important lesson we can all learn is to never get too carried away when the market is booming or too disenchanted during property slumps. Letting your emotions drive your investments is a surefire way to disaster.
Let’s look at five big lessons:
Lesson 1. Booms don’t last forever
During a boom everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn.
Our property market behaves cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom.
Let’s face it, while the news is much less positive today, we know over the next few years the flatter market conditions will be followed by another property boom and then another downturn.
And over the next decade we’ll have another recession (we have one every seven to 10 years) and we’ll most likely have another depression one day.
The lesson from all this is to get prepared for the next phase of the property cycle.
During the last cycle, most investors didn’t really have their upsides maximised or their downside covered.
Lesson 2. Beware of doomsayers
For as long as I have been investing, and that’s over 40 years now, I remember hearing excuses from people about 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 10 years or so.
Fear is a very powerful emotion, and one that the media used 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 3. Follow a system
Smart investors follow a system to take the emotion out of their decisions and ensure they don’t speculate.
This may be boring but it’s profitable.
Let’s be honest, almost anyone can make money during a property boom because the market covers up most mistakes. But many investors without a system found themselves in financial trouble when the market turned.
Warren Buffet said it succinctly: “You only find out who is swimming naked when the tide goes out.” In other words, if you aren’t following a system that works in all market conditions you will be caught naked when the market changes.
If you prefer to have consistent profits and reduced risk, follow a proven system. Make your investing boring, so the rest of your life can be exciting.
Lesson 4. Get rich quick = get poor quick
Real estate is a long-term investment yet some investors chase the “fast money.”
You’ve probably met people like that – they look for that deal that will make them fabulously rich. When you see them a year later, they’re usually no better off financially and still talking about the next deal that will make them rich.
They are often influenced by the latest get-rich-quick artist with a great story about how you can join them and become stupendously wealthy.
Their stories can be very compelling, even hard to resist.
They often pander to the wishes of people who would like to give up their day job to get involved in property full-time but in reality it takes most people many years to accumulate sufficient assets to do this.
Patience is an investment virtue. Warren Buffet said it right when he said: “Wealth is the transfer of money from the impatient to the patient.”
Lesson 5. It’s about the property
You’re in the business of property investment, yet during the last boom many investors forgot the age-old property fundamentals of buying the best property they could afford in proven locations.
Instead they got sidetracked by glamorous finance or tax strategies and some lost out.
Smart investors do it differently.
They make educated investment decisions based on research and buy a property below its intrinsic value, in an area that has above average long-term capital growth and then add value creating some extra capital growth.
These are just five of the many lessons that I learned investing through previous property cycles.
The markets are slowing down but they’re not in reverse – they’ve just slipped form fifth gear to second gear.
We know that over the last few years ago the pendulum swung too far in some regions and the markets are catching their breath. In some areas property prices are flat and in others they have fallen and will continue to languish for a while.
We also know that if history repeats itself, some markets will swing too far into the negative, driven by fear.
If you learn these lessons from previous cycles the rollercoaster ride will not be as dramatic this time around because you won’t let your emotions drive your investment decisions.
Remember both fear and greed will drive you down the wrong path.
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.