Normally I'm a fairly calm person, but one thing that really makes my blood boil is reading commentary about the property market from so-called ‘experts’ who base their opinions on unfounded assumptions and misconceptions about how the property market really works.
Blogger: Simon Buckingham, director and property mentor, RESULTS Mentoring
Such commentary can be downright dangerous, because many people will believe the advice and lose money because of it.
A case in point is an article that came across my desk last month (not one published by Smart Property Investment). The author of the article, who'll remain nameless to protect the guilty, is supposedly an 'expert' on the property market. In the offending article, they claim that:
• Holding a property for the long-term reduces the risk for an investor.
• Even if a property's value falls, you only lose if you sell for a loss.
• If you hold a property for at least 10-years you're assured of a great profit.
This kind of commentary perpetuates a myth built on a lie about how property prices behave. It boils down to what I believe to be the WORST advice anyone ever came up with in property investing...
"Invest for the Long Term"
You've probably heard the saying that success in property investing is all about time IN the market, not timing the market.
Well, at the risk of challenging some deeply held beliefs, I couldn't disagree more!
Contrary to "popular wisdom", the idea of time IN the market - investing for the long term - actually increases the risk of your investment.
Consider all those people who were approaching retirement with their superannuation "invested for the long term", when the GFC hit in 2008. Stock portfolios and super funds were hammered, and many 60+ year olds were forced to put off retirement and keep working in order to rebuild their retirement funds.
The problem with investing "for the long term" is that you have absolutely no idea what the market will do to the value of your investment at the time you need the money the most.
Unfortunately, most investors buy into the myth that property values double every 7-10 years, and believe that if they just hang on for 10 years or more they'll be ok.
The Biggest LIE In Property!
Let's take a look at some facts about growth in property values over time, and in doing so, expose one of the BIGGEST LIES in property investing...
We'll use the country's hottest market at the moment, Sydney, as the test case. The chart below shows the median Sydney house price over the last 25 or so years:
We can see for the 10 years from 1988 to 1998, Sydney house prices actually went sideways or down for much of that period, before eventually turning up at the end, resulting in an average annual growth over 10 years of just 3 percent.
And this is before accounting for the effects of INFLATION. With inflation running at an average rate of 3.1 percent over the same period, if you'd owned the median priced Sydney house from 1988 to 1998, your actual gain in real terms would have been NOTHING!
Look more recently - at the 10 years from 2002 to 2012 - and we see a very similar picture. Again, the average annual growth in Sydney over the last 10 years was just 3 percent. Inflation over the same period averaged at 2.8 percent, leaving us with an actual gain in real terms of next to nothing!
In fact, if you go right back to 1901 and measure growth in median property prices from then 'til now, you'll find that the average rate of growth adjusted for inflation works out to be just 3 percent per annum over that entire period!
Clearly, timing the market to pick periods of strong growth is much more important than time IN the market.
And the idea that property prices double every 7-10 years (which would require a sustained average compounding growth rate of 9 percent or more) is just plainly, factually WRONG!
Yet you'll see this assumption of 9% average annual compounding growth used time and time again as a selling tool in the glossy marketing brochures of property spruikers, where they show you how the value of their off-the-plan property MIGHT increase over the next 10 years.
And unfortunately many people fall for this - believing it's somehow inevitable that any investment property will go up substantially in value over 10+ years, even though there's no factual support for such an assumption!
If their property actually goes down in value after they buy it, many investors will console themselves with the idea that:
"You only make a loss if you sell for a loss"
I'm sorry, but that's just a cop-out!
A poor decision to buy a property in an area that goes down in value, doesn't become a better decision just because the loss isn't 'crystallised' by selling.
And there is a very real loss here - not just the 'paper' loss while the investor holds on and prays their property goes back up in value... You lose the opportunity to have the money invested in something else with a positive return!
What's more, you lose the time that your cash or equity is tied up in the property while you wait and hope that it comes back up in value. Time in which you could have been maximising your returns rather than sitting on a dud asset.
So What's The Alternative?
If long-term growth is so uncertain, and if we acknowledge that there's a very real opportunity cost if we buy a property that goes down in value while we hold it, is there a different approach?
Is it possible to get any level of confidence about SHORT-TERM growth?
Here's the thing... Most market commentators, along with most investors, don't realise that with recent advances in the science of property market analysis it is possible to predict how the property market in a suburb will move in the next 6-36 months, with a high degree of accuracy!
In essence, accurately predicting whether property values in a suburb are about to boom or fall requires an understanding of market dynamics (the interaction of supply and demand within a suburb).
Those who don't believe short-term market movements are predictable, and who therefore rely upon investing "for the long term", are simply ignorant of market dynamics and lack an understanding of how the property market really works.
However, even with the most advanced market analysis, the ability to accurately anticipate market movement drops away substantially when trying to predict further out than about 36 months. Therefore, the longer your timeframe, the less control you have over your investing outcome, and THE GREATER YOUR RISK!
Because of this, my #1 Property Investing Rule is:
If you don't expect to make a significant profit within 6-36 months,
you shouldn't be doing the deal!
If you think you're going to have to wait longer than 36 months to substantially profit from the deal, then you're gambling on market movements that you cannot predict, and have little control over the financial outcome of your investment.
Taking control of your long-term financial future - almost counter-intuitively - requires taking a shorter-term view of your individual property investments!
Don't fall into the 'speculation trap' of simply buying any property in any suburb and hoping that it will go up in value over the long term.
Always research the area that you plan to invest in, and ensure the short-term growth outlook is positive before you dive in. Learn how to crunch the numbers, and know specifically how much you expect to make from the deal, and by when, BEFORE you purchase any property.
About the Blogger
A highly experienced investor, Simon has purchased more than 50 properties in the last 7 years alone, using a broad range of strategies including positively-geared residential rentals, vendor finance deals, renovations, developments and commercial properties, both within Australia and overseas.
As a Director and Property Mentor at ResultsMentoring.com - the home of Australia's best independent property mentoring program - Simon now spends his time investing, developing property, and building businesses - while teaching others how they can do the same.
He has personally coached over 700 investors in techniques that can be used to profit from property in any market, and has presented to thousands of people at property conferences and seminars around Australia and New Zealand. Simon co-authored the critically acclaimed Australian property book The Real Deal: Property Invest Your Way to Financial Freedom published in 2010 by Wright Books, and regularly contributes to articles in Smart Property Investment and other media.