I have attached a graph of the last 20 years of capital growth for a house in the Sydney LGA, and make the following observations:
1. Real estate growth does not go up in a nice smooth linear fashion.
What it does, is have periods of low / no / falling i.e. "flat" growth - identified in the graph in 3 areas as "Flat". Looking at the graph you might also identify the time around 1990 as being "flat" also.
2. In between these flat times are growth spurts - some are quite dramatic. It is not uncommon to see 40% & 50% per annum growth in
some years.
For what it is worth, these are the years that the media reports as "boom" years (and rightly so). It is also the time that experts come out and say it can't go on forever (which it can't).....whilst others come out predicting "the end of the world as we know it"
. and "how can our kids ever afford a home" and "we have the most unaffordable housing in the world except for New York, London or wherever..."
In my brief time on the planet, I have seen several types of people and how they made or lost money by investing in real estate.
1. The novices. They are easily swayed by some of Doom & Gloomers who are currently predicting that point "D" is the precipice of a cliff, off which prices will fall. Unfortunately, the novices take their advice and sit on their hands waiting for the price of real estate to get cheaper before they "buy in". When prices don't go down, they blame the government for artificially propping up the market or some other excuse.
2. The genius. He buys at the end of a flat spot (like "A" in 1999) and sells 2 years later in 2001. He got in and out and made a profit. He is the talk of the dinner table. All his friends, including himself, think he's a genius. He does it again, buying in 2002 and selling for a good profit at the end of 2003 only 18 months later....more genius. Unfortunately, this guy buys back in after a dip in 2005 and 3 years later has only just managed to get his original investment back minus holding costs and transaction costs.
His friends, that took a lead from him this time, aren't all that impressed anymore.
Some of them go on ACA or TT to complain about how they should be compensated for their losses since they invested their life savings.
3. The guy that always loses money on real estate. I have a tiler who is like this. He buys at the peak of the boom - like "B" in 2003/4, holds through the flat / downturn and after 3 - 4 years of no growth, sells at point "C"
. He tells all and sundry that only lucky people can make money in real estate.
4. The guys who buys and sells too soon. He's like the guy in point 1. above, buying in 1999 and selling for a profit in 2001. He looks back in hindsight in 2004 and realises that he missed a further $1/4 Million by not holding for 3 more years. If he's smart, he will learn to hold forever (in my opinion).
5. Finally, I see those that are not smart enough to "time" the market. The only thing they "know", is that taken over the long term (10+ years), that real estate always grows in value. They buy, they hold through the ups and downs and flat spots of the market. They ignore the media "noise". They see the government of the day and its policies as largely irrelevant to wealth creation. They take the RBA's announcements with a grain of salt. They certainly don't sell when educated economists on TV predit a 40% fall in prices.......and they end up very wealthy.
Which one will you be pauly?
