Best Way To Invest In Property

Best Way To Invest In Property

1. The economy and our property markets move in cycles.

And the main cause behind these cycles is that we're human and tend to share the general optimism or pessimism of others.

It’s a common fallacy that Australian property cycles last 7 – 10 years. They 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 or interest rates.

For example, the current property cycle is being prolonged by a period of historically low interest rates.

Yet it’s my observation that investment markets often "overshoot." That is, they move by more than changes in the fundamental influences would seem to require – on the upside as well as the downside.

Take the Perth property market which experienced significant growth (overshooting its fundamentals) during the recent mining boom. And now home prices have fallen 20% from their market peak in Perth and are likely to fall further.

2. 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.

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.

Remember that each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.

3. 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 CBD high rise off the plan apartments in Brisbane and Melbourne, there are more buyers looking for homes than there are properties on the market in the middle ring suburbs.

4. We need to allow for the X factor

When most Australians here about ‘the X factor’ they think about a talent show on TV.

However, ‘the X factor’ is also talked about in the less glittery world of economic forecasting.

Economists refer to ‘the X factor’ when an unforeseen event or situation blows all their carefully laid forecasts away. 

More recently Nassim Nicholas Taleb, a finance professor and author, popularized the term Black Swan events for these deviations from the expected. 

I first came across this concept many years ago when distinguished economics commentator, Dr. Don Stammer, used to try and predict the X Factor for the forthcoming year in the January edition of the now defunct BRW magazine. 

Of course, the X factor is unforeseen, so you can’t predict it. But it was a little game he used to play and then review his prophecy 12 months later.

And it is a game I also took up many years ago and have had fun with over the years.

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.)

One of the X factors for 2016 was how interest rates dropped to historic lows. It wasn’t that long ago that most economists were expecting a rise in rates by now

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.

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 several property markets and having patience.