At this time of year it’s customary to look at the year that has just passed and make some forecasts for the year ahead.
Well…2011 will be remembered as the year the property market slumped. It didn’t crash like many property pessimists predicted, but it stalled in some areas, dropped a little in others and prices fell significantly in a few spots.
Ongoing economic uncertainty, the worry of rising interest rates for much of the year, decreasing affordability and political uncertainty were a volatile mix that stalled the property investment markets.
Let’s look at what really happened over the last year and see if we can extract some property investment lessons for 2012.
Firstly here are the latest figures from RP Data for the year to Ocotber 2011:
|City||Median Price||Growth last yr||Median Price||Growth last yr|
Source: RP Data.
The markets are fragmented
What these figures don’t show is how fragmented our various property markets really are.
Did you know that homes located in 80% of Sydney suburbs have actually had capital gains of around 1% over 2011? It is only the most expensive suburbs in Sydney, the more affluent areas, which have been the hardest hit and have suffered price declines. In these suburbs prices fell around 3.2% over the year.
And the markets are similar right across Australia.
For example, the cheapest 20% of suburbs in Melbourne have recorded capital losses of only 2.3% in 2011. In contrast, Melbourne’s dearest markets have seen price falls of 10% or more.
It’s the same all around Australia according to RPData. The most expensive homes across the capital cities have experienced capital losses of 5.6% in the year-to-date. The lowest priced homes, by way of comparison, have dropped by less than half this amount, or 2.1%.
What I call “investment grade properties” in the middle price range (say $450,000 – $950,000), in prime locations and with an element of scarcity are still selling well, even though there is clearly less interest from both owner occupiers and investors than there was before.
However “B” & “C” class properties are not selling well. Some have dropped in value by maybe 10% and some can’t be given away (well…it’s not really as bad as that, but you’d have to give a very steep discount for someone to buy them).
And all the key indicators suggest the slow down will continue well into the first half of 2012. The number of properties on the market is high, properties are remaining on the market for sale longer and many buyers are still nervous about making a decision.
5 Property Lessons for 2012
To ensure you don’t get burned in the coming year and to give you a chance to make the most out of our changing property markets, I would now like to share some important lessons I’ve learned from previous cycles.
Probably the most important lesson we can all learn is to never get too carried away when the market is booming or too disenchanted during property slumps. Letting your emotions drive your investments is a sure-fire way to disaster.
Let’s look at 5 big lessons:
Lesson 1 – Booms don’t last forever
During a boom everyone is optimistic and expect the good times to last forever, just as we lose our confidence during a downturn.
Our property market behaves cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom.
Let’s face it…while the news is much less positive today, we know that over the next few years the flatter market conditions will be followed by another property boom and then another downturn. And over the next decade we’ll have another recession (we have one every seven to 10 years) and we’ll most likely have another depression one day.
The lesson from all this is; get prepared for the next phase of the property cycle. During the last cycle, most investors didn’t really have their downside covered or their upsides maximized.
Lesson 2 – Beware of Doomsayers.
For as long as I have been investing, and that’s over 37 years, I remember hearing people with excuses why property prices will stop rising, or even worse, why property values will plummet. However in that time, well located properties have doubled in value every 8 to 10 years.
Fear is a very powerful emotion, and one that the media use 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.
Lesson 3 – Follow a System
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 found themselves in financial trouble when the market turned.
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 out when the market changes.
If you prefer to have consistent profits and reduced risk, follow a proven system. Make your investing boring, so the rest of your life can be exciting.
Lesson 4 – Get Rich Quick = Get Poor Quick
Real estate is a long term investment, yet some investors chase the “fast money.”
You’ve probably met people like that – they look for that deal that will make them fabulously rich. When you see them a year later, they’re usually no better off financially and still talking about the next deal that will make them rich.
They are often influenced by the latest get-rich-quick artist who has a great story about how you can join them and become stupendously wealthy. Their stories can be very compelling, even hard to resist. They often pander to the wishes of people who would like to give up their day job to get involved in property full time, but in reality it takes most people many years to accumulate sufficient assets to do this.
Patience is an investment virtue. Warren Buffet said it right when he explained that: “Wealth is the transfer on money from the impatient to the patient.”
Lesson 5 – It’s about the property
You’re in the business of property investment, yet during the last boom many investors forgot the age-old property fundamentals of buying the best property they could afford in proven locations. Instead, they got sidetracked by glamorous finance or tax strategies and some lost out.
Smart investors do it differently. They make educated investment decisions based on research and buy a property below it’s intrinsic value, in an area that has above average long term capital growth and then add value, creating some extra capital growth.
These are just 5 of the many lessons that I learned from the recent property downturn.
We know that a few years ago the pendulum swung too far in some regions and the markets are catching their breath. In some areas property prices are flat and in others they have fallen and will continue to languish for a while.
We also know that if history repeats itself, some markets will swing too far into the negative, driven by fear.
If you learn these lessons from previous cycles the rollercoaster ride will not be as dramatic this time around because you won’t let your emotions drive your investment decisions. Remember both fear and greed will drive you down the wrong path.