In many situations, being part of the crowd can be rewarding.
Outdoor festivals, markets, concerts, stage shows: these are all events that are considerably better when enjoyed with the buzz and energy of a large crowd.
There are also situations where you should be wary of a crowd – and investing in property is one of them.
If you get caught up in the hype, follow the crowd and park your hard-earned dollars where most others are investing, you could be participating in a very risky game.
Why is crowd-following dangerous?
It can be oh-so-tempting to follow in the hot-spotting footsteps of others, who you believe have done all of the research and due diligence for you.
However, I won’t be the only one to tell you that this strategy is fraught with danger.
In simple terms, I liken it to crossing a road with no crosswalk. If you dart out across gaps in traffic on your own, you feel very vulnerable.
But if you step out at the same time as someone else, you feel slightly safer.
You may perceive that your risk has changed; that you are somehow less vulnerable to a negative outcome. “Surely they wouldn’t step out into traffic if they felt it was dangerous,” you assure yourself.
However, here’s the problem:
Your level of risk hasn’t actually changed.
It’s only when you use your own wits to make a decision that you are truly minimising your risk.
You may perceive that you have ‘safety in numbers’ but the truth is, stepping out into traffic is just as risky, whether you do it alone or with someone else.
When doing something as simple as crossing the road, that means looking both ways, observing the traffic flow, listening for wayward or speedy vehicles and ascertaining an appropriate gap in traffic before stepping out.
The same principle applies with investing….
Just because other investors, or a crowd of investors, are flocking to a particular suburb, town or shiny new development, that doesn’t necessarily mean it’s safe or suitable for you to invest there.
You can’t assume that just because plenty of other people are doing it, the research and due diligence has been done.
In fact we know most investors “fail” and never get past owning one or two properties.
Of course I do appreciate how seductive property investing can be.
The slick marketing campaigns, the beautiful new apartment towers, the quick calculations and promises of incredible returns: these can combine to create a very pretty picture of what your future wealth could look like.
Some people call this hype, others call it excitement.
When I see investors getting caught up in the next “hotspot” I call it contagion, because their decisions have the ability to contaminate their entire portfolio with bad deals.
The emotions of the property cycle
There is a documented flow of emotions that investors tend to experience during property cycles; you may recognise one or two of these, especially at this stage of the property cycle.
During the upturn phase of the cycle, as we experienced over the last few years, it starts with optimism.
This progressively gives way to excitement, as the market moves on and property makes the front page of the weekend papers and the current affair shows on TV.
By this time, many regions are likely to be experiencing growth in values. Official figures show spikes in property sales – both volume and value – and investors are clamouring to get a piece of the action.
Bidding wars ensue
Houses are listed for only a couple of weeks, if not days, before being snapped up.
If you’re in the bidding, you experience the thrill of chasing these most sought-after commodities and if you actually secure a piece of the pie, it may give way to euphoria, as the actions of the thousands of similar frenzied investors push the property’s value ever higher.
Unfortunately, it’s usually at this point – with the crowd fully active and on board – that the market becomes overvalued.
A rush of energy and activity has lit up the market for a short period, but now, it only takes a small piece of negative news to tip the market down.
When the market peaks and moves into the slump phase (and it always does), investors initially see it as a short-term setback.
This anxiety quickly gives way to fear as investors start to question whether the area they invested in is experiencing a minor blip or a major correction.
Often property values remain stagnant for a year of two, or if they’ve risen too strongly they fall a little and some, less experienced investors or those who haven’t set up the right financial buffers surrender to the situation, with many becoming despondent, selling up their investments.
It is at this point – when there is maximum crowd pessimism – that savvy investors strike.
By now the crowd has moved on.
What’s more, many investors have sold their properties on the cheap, providing new buyers with the best opportunity for returns.
I want to make two things clear:
1. I’m not suggesting it’s currently the wrong time (or too late) to get into this particular property cycle
I’m just explaining the trends I’ve seen in previous cycles to help make you a more informed property investor.
2. When I use the word ‘market’, I’m not referring to all of Australia, as if the nation exists as one single market
The Australian property market is comprised of hundreds and hundreds of smaller markets that are each impacted by specific influences.
Investors often refer to a capital city as a market – people might say that “Brisbane is in recovery” or “the Sydney market is booming”.
The reality is, these cities have markets within markets – some are defined by price points, others by demographics or geographic locations.
It could be the case, in fact it is, that one suburb within Sydney is going gangbusters, while another suburb across town is languishing because of affordability or employment issues.
It can even be the case that within one suburb, there are various sub-sectors of the market that are responding differently.
Apartments located on the water may be in short supply and high demand, consequently selling through the roof, while a stack of units located in that very same suburb, but a few blocks from the beach with no view and no amenities, languish on the market.
My point is that every (sub) market has different mechanisms at play.
And when I say that your best chance of success is tied to your ability to do the opposite of what the crowds are doing, I mean this on a micro-level.
When I suggest that you should be cautious when everyone else is buying, and buy when everyone else is selling, I’m suggesting that you should consider stepping back from or leaning in toward certain markets in contrast to what the crowds are doing.
Remember…if you do what most other property investors do, you’ll get the same results.
And most property investors fail. They don’t get past there first or second property.
Take Moranbah, for example
This much-hyped mining town was on the top of every property hotspotting list for most of 2012, with “experts” touting sky-high rent and inflated values as a reason to flock to the regional Queensland area.
And people did.
Thousands of them.
Investors bought up big and enjoyed rental returns upwards of $2,000 per week…
Until the bottom fell out of the market.
Clearly, those returns were not sustainable over the long term and many investors were burned, having over-paid for average, regional property assets that now return so-so rents.
As a side note, in my view, mining towns very rarely make sense as a long-term vehicle for creating wealth; there is too much volatility for my liking.
I’d take a good quality property in a capital city any day – the type of dwelling that will always be in demand with owner occupiers (who push up prices) and tenants who help pay your mortgage.
These are the properties that tend to enjoy consistent and substantial capital growth over the long term. But, that’s a topic for another blog!
Here’s the bottom line:
I’ve found that smart, successful property investors have a plan and follow a strategy rather than following the crowd or the latest fad or hotspot.
This may be boring but I remember one of my early mentors teaching me that 99% of long-term investing is doing nothing and that the other 1% will change your life.
A client who is a pilot once described his job as “hours and hours of boredom punctuated by moments of sheer terror.”
I think of property investing the same way…
Your success will be determined by how you respond to punctuated moments of terror or excitement (you know…all that bad news in the media or the hype of the next hotspot), not the years and years spent on cruise control.