Worst Property Advice

This was emailed to me, thought it was very good, for those interested in timing the market.


"The WORST Property Investing Advice EVER!"

I've just been reading some commentary about the property market that's just plain dumb. And downright dangerous because many people will believe the advice and lose money because of it.

The author of the comments (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 the 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.

Aaaaagh!!!!

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.

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. 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.
 
Great post Marisa, ive always felt the whole "time in the market" thing was often a cop out, especially when you take into account the opportunity cost of the money.
 
Many years ago I fell for the line "buy the cheapest property in town, it will increase in line with everything else here". Sold it last year, 7 years after purchase for 15k less than I bought it for.
 
Very detailed and insightful. Thankyou Marisa.

Would you exclude the strategy of Land Banking from the 6-36 month horizon?
 
"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! "

Would love to see a peer reviewed study to back up that claim.
 
Very detailed and insightful. Thankyou Marisa.

Would you exclude the strategy of Land Banking from the 6-36 month horizon?

Hi Tano

I have no real timeframe with my land banking properties as I am waiting for rezoning to be ratified in about 2-3 years where I expect prices may rise again.

I think land banking is probably a different kettle of fish because the idea is that you will be adding value when you develop. The only issue I see with this strategy is that it may be very difficult to hold long term as development properties generally sell for a premium. It would really be dependent on your own situation I guess. That is in part why I purchased in an area earmarked for rezoning, lower entry level, easy to hold long term.

MTR
 
"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! "

Would love to see a peer reviewed study to back up that claim.



There is no secrets.... I like the simplicity of this, article featured in API John Lindermine?, logical to me... its the old supply vs demand thing

You only need to track sales and listings.
Supply and demand, the number of dwellings available for purchase compared to the demand in any area, suburb or city. The changes in ratio over time lead directly to movements in prices because housing prices will fall in suburbs where the numbers of properties listed for sale on the market are higher than the number of potential buyers.

Compare total number of houses or units listed for sale in a suburb to the total ANNUAL number of house or unit sales in the same suburb.
The ratio will determine the current type of housing market.
This information is available even in API Mag, Databank.

For example -
Stressed Housing Market - listings 4-5 times the number of sales (prices have fallen more than 10%)

Neutral - (prices are not changing)

Boom - (prices rising by more than 10%)

Some of the best opportunities are properties that are neutral or even stressed but you need to track the current ratio of intending sellers to buyers in selected suburbs then keep a check on any emerging trends.

As suburbs usually take many months to move from stressed to buyer markets, doing your research once a month is sufficient to identify any that are on the move.
 
I think land banking is probably a different kettle of fish because the idea is that you will be adding value when you develop.

I got lucky on a development site which has increased so much in the last 2 years I could sell it now and be debt free. That's pretty tempting! Only problem is that if I want to jump back into the market to do a development in 12 months time, I would have to double my current debt on that property to be in the same position I am in today. That would be crazy! I would rather hold and develop when I am ready.
 
I'm curious now

I can't find which 'expert' on the property market actually said the below in an article :confused:

Holding a property for the long-term reduces the risk for an investor.
Even if the 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.
 
I found a fantastic property in Bris (yes another one Marisa ;)) It was about 7 k's from the city (Holland Park), a cladded fibro house built in the middle of 2 seperate titles x 400sqm. I attended the auction with my parents. I said if my parents didn't make an offer, I would. my parents ended up purchasing it. They sold about 6 - 8 years later when it tripled in value. My mum's accountant was amazed at how well it performed and stated he usually advises his clients to sell after property doubles in value. That is the strangest comment/advice I've heard! Developer/RE Agent purchased it and made a killing!
 
I found a fantastic property in Bris (yes another one Marisa ;)) It was about 7 k's from the city (Holland Park), a cladded fibro house built in the middle of 2 seperate titles x 400sqm. I attended the auction with my parents. I said if my parents didn't make an offer, I would. my parents ended up purchasing it. They sold about 6 - 8 years later when it tripled in value. My mum's accountant was amazed at how well it performed and stated he usually advises his clients to sell after property doubles in value. That is the strangest comment/advice I've heard! Developer/RE Agent purchased it and made a killing!

I haven't met many accountants cluey with property :p
 
Well, between 1998 and 2002, it did actually double (from $250 to $500k), so as long as your property cost nothing to hold, cash flow neutral or positive, and you use 100% money from the bank, i do not see the trap. If you hold long enough there will be an opportunity window to sell for big profit.

Just an opinion, i am not an expert with property, but can analyse curve and data.
 
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