It doesn’t matter how long you’ve been involved in property, there are always lessons to learn.
That’s one of the best parts of being involved in real estate.
I’m always learning from the property markets; they are so dynamic that you never quite “solve the puzzle”, because the puzzle is always getting reshuffled in front of you right when you think you’ve got it solved.
So, what were the lessons from 2016 that we can take into 2017?
1. Property is a game of finance
Many investors found their borrowing capacity greatly decreased in 2016 as banks increased their serviceability criteria.
The Australian Prudential Regulation Authority (APRA) instigated measures to slow down lending to investors, due to concerns about the higher proportion of investors in the market — especially in Sydney and Melbourne.
This trend is already continuing this year. There are signs from the Reserve Bank to suggest that interest rates will remain unchanged and that the cycle of rate easing has come to an end.
However, what is also happening again this year is the banks are independently increasing interest rates, especially to property investors.
2. Our property markets are fragmented
The markets across Australia were fragmented last year and will likely remain that way in 2017.
The Sydney property market is defying the constant predictions of a looming “correction” and continuing to record strong property price growth.
Likewise, Melbourne’s property market is posting regular property price increases.
The strength of both of these markets is underpinned by their strong economies, which are creating jobs and population growth.
Conversely, Perth and Darwin’s market are struggling due to the resources downturn, while Brisbane holds promise but has yet to truly deliver.
3. Nobody really knows what’s going to happen to our property markets
The evidence is overwhelming that we know much less than we think we do — even when we’re armed with all the data and reports.
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Last year the market forecasts, even from the best experts, tended to be wrong — some on the upside and some on the downside.
There is no clearer indication that nobody really knows what’s going to happen to our property markets than the continuing strength of Sydney.
If our property markets taught us anything over the last few years, it is to expect the unexpected.
Of course I don’t know what this will be, but it’s likely to be in the realm of finance.
We have already seen the biggest lender in Australia pull out from lending to new property investors and there are rumours that other banks, straining under the burden of taking over these loans, will also buckle and restrict lending.
In the past it has been finance this is brought an end to previous property cycles, either through rising interest rates or a credit squeeze.
4. The government doesn’t really want to tinker with negative gearing but …
The federal budget will be released in May and again there has been talk about tinkering with negative gearing.
Unfortunately, some people believe that the booming conditions in Sydney, and to a lesser extent Melbourne, are due to investors being able to negatively gear their properties, which is not in fact true.
Negative gearing has long been a political football, but with about 1.2 million investors using this taxation deduction — who are also mostly middle class Australians — it would be a very unpopular decision to axe it.
5. The doomsayers will be out again
For as long as I have been investing, and that’s over 40 years now, I’ve heard people “explain” why they believe property prices will stop rising, or even worse, why property values will plummet.
However, in that time, well-located investment grade properties have doubled in value every 10 years or so.
Fear is a very powerful emotion and it’s one that the media regularly uses 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.
I’ve never really understood what could be motivating that — except perhaps jealousy — when some 70% of Australians own a property: their own home.
If the market sky was really going to fall, as many “predict”, the economic impact would be devastating to the vast majority of people, so how could that ever be a good thing?
6. Strategic investors who follow a system will be ahead
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 find themselves in financial trouble when the market turns. 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, then follow a proven system.
Make your investing boring, so the rest of your life can be exciting.
7. Some property investors will miss out
Fear of missing out is currently driving some investors to start to speculate on the market, rather than to invest wisely.
Of course I understand why they are keen to share in the profits others have achieved through property, but sometimes the right thing for an investor to do is nothing.
In fact, I’ve made more money by saying “no” instead of saying “yes”.
That’s because all of my investments have been made as part of a planned strategy that involves property, finance, and tax.
But many beginning investors are now making emotional decisions and that’s why I’m calling it speculation.
So, just like last year, those who chase the next hotspot, invest in off-the-plan properties, buy new homes in new housing estates, or purchase secondary properties are likely to miss out in the long-term.
The bottom line …
What is boils down to is that the market in 2017 is going to be different than in 2016, but in some ways it will be the same.
Lending is unlikely to get any easier as banks and the APRA tighten the finance screws, especially on investors.
Some people will speculate on the market and be disappointed when the results they “dreamed of” don’t materialise because they didn’t following a sound investment strategy.
The wiser move, no matter the market conditions or the year, is to only buy investment grade properties in locations that are likely to achieve above average capital growth.
Successful property investment shouldn’t be a game of highs and lows, but a rather boring state of affairs that quietly creates wealth for you over the years.
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.