How will an election year affect our property investment markets?

2013 will be an Australian election year and already people are predicting what this is going to do to our real estate markets.
As a property investor how should you deal with the uncertain times ahead?
I’ll give you some thoughts in a moment but first…
A random walk
They say that Sydney Grade Cricket is a young man’s game.
The amount of time you have to commit to matches and training sessions certainly makes it more suitable to a carefree youngster with few commitments. But so much of cricket is played ‘in the head’ that you often find that wily senior players punch above their weight.

In my earlier cricket days I would get very excited and full of myself on a good day when I made a big score, but after a run of 2 or 3 ‘outs’ I would become morose and dread being tagged with the label of a guy who was “out of form”.

It was only as I became a little more experienced and started to understand the psychology of cricket (as well as learning a few tricks of the trade) that I began to score much more heavily.

It was around 1999 that I first saw books on cricket psychology in Sydney. I remember being quite surprised and also enlightened. What separates good players from the greats such as Steve Waugh, they said, was that the Waughs of the world only look forward, not at what has gone before.

Even if you are struggling and batting like a left-handed Glenn McGrath, a batsman should resolve to not get out cheaply and say to himself or herself: “Next ball!”.

Steve Waugh continued to say “it’s not how, it’s how many” and “next ball!” to himself for season after season until he’d notched up ten thousand Test Match runs. It was substance over style for Steve Waugh.

One of the key lessons I learned was that, if the first half of your season has a run of scores like this – 90,45,64, 20, 0, 2, 8 – then you will be labelled as an “in form” player for the first 4 rounds, then quickly re-badged as a guy in the dreaded “form slump.”

Yet, if you re-assemble your same scores in a totally random order – 64, 20, 45, 8, 0, 2, 90 – what do you get?

Some good scores and then a form slump!

Looking forward in investment

Investors need to be able to assess their portfolios objectively at any point in time. Look forward at what is coming next, not at what has gone before.

If you bought a share for $10 and it is now worth $5 that doesn’t mean you should hold on to it and pray for a recovery if the company has poor prospects.

I’m a strong advocate of buying property and holding on to it indefinitely, yet if you’ve bought a genuine lemon in a region or city with average or poor prospects, consider whether you might be better to lump paying further stamp duty and re-allocating the property element of your portfolio elsewhere.

An end to market cycles
There was a widely-espoused theory that investment market cycles would become a thing of the past as markets became more rational and efficient and learned from the past. That was always unrealistic as markets are driven by human emotions, and the 1987 crash and later the financial crisis shattered any illusions of that theory holding true.

But have we moved towards shorter, more fractured cycles?

It might seem as though we have but I don’t think so. It may sometimes appear this way but in truth this is as much to do with the high frequency and vast volume of market commentary we are now asked to absorb which makes market movements appear more staccato. It’s mainly an illusion.

Think back to Steve Waugh and his form slumps (not that he had many).

Markets have always moved up, levelled off, fallen a little, stabilised and recovered again since time immemorial.

The main thing which has changed is that every up-tick and down-tick is analysed and re-analysed to death.

Market commentary, for needing something to say, tries to explain stock price movements which sometimes have no logical explanation (hence terms like ‘profit-taking’, ‘bull trap’ and ‘bargain-hunters’).

And in what I think must be some kind of first, we’ve even seen technical analysis applied to a few days of property price data – complete with discussion of support and breakout levels (technicals might have some slight relevance if median property price data was an accurate and appropriate enough gauge and if buying property ever becomes as quick and as easy as buying a jam doughnut – but not today).

Election years
There is another long-held theory that markets can slow down or stall in election years and historically there is probably an element of truth in that.

The theory is that investment markets suspend their normal course of trade pending the uncertain outcome of the election.

Would Australia be hugely different under an Abbott government? Would a Liberal government introduce wildly different policies from a Labor party in power?

It depends on your viewpoint on some of the key pollies and characters involved of course (!) but most elected Australian politicians today do not veer radically too far from the centre-right.

Should you let the uncertainty stop you from investing?
I don’t think so.

Now it may well be that in Q3 around July or August we see something of a slowdown in market activity and thin trades, but we should take care not to be fooled by randomness.

While I have a base case, I can’t possibly know what will happen to share markets and property markets over the next 6 months or so, but there is every possibility that with stocks having already been on a 20% run over the previous 6 months, that even prolonged low interest rates cannot prevent the All Ords bull run from running out of steam in the first half of this year.

The property markets present a similar proposition. With the cash rate at just 3.00% there is every chance that property markets put on a growth spurt in the first half of the year, but it would be a brave forecaster who suggested that a ‘bull market’ (it feels wrong using this terminology to describe real estate markets) will blaze ahead throughout 2013 given that many markets are hardly coming from a low base.

Obama romps home
A good case in point was the Obama election victory. It’s easy to be drawn into the daily market commentary but much of it is little better than jargon-fuelled guesswork.

In the lead-up to the US election market analysts said that what stocks needed to stabilise from a small wobble was “a decisive election outcome”. If we got that, they said, it would be full steam ahead.

Well, we got that decisive election outcome as Obama took out the Presidential election in a cakewalk – and the Dow responded by…instantly going on a dire multi-trade losing streak. So much for the forecasts!

Will a 2013 election have a slowdown effect on Australian investment markets?
Actually it might well, but we should be wary of making false associations or muddling cause and effect.

Although investment markets can often cope reasonably well with all manner of dire and diabolical news, if there is one thing that markets don’t like, it is uncertainty. Now Julia Gillard has taken one element of uncertainty away by announcing the election date.

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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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