Now that we've worked our way through Covid, what can we expect to happen to our property markets over the next decade?
That’s a common question I’m being asked by both our clients at Metropole and many media sources now that we've experienced a strong year in property, but we're facing headwinds like APRA's intervention and the potential of rising interest rates.
But I think I’m disappointing them with my answers because I tend to say something like “a lot will happen over the next decade, but I don’t make forecasts - instead, I have expectations.
Now there’s a big difference between forecasts and expectations.
I expect there to be another recession in the next decade.
But I don’t know when it will come.
I expect the property market to continue to remain strong over the next year or two and then prices will slump or maybe even tumble. But I don’t know when.
I expect that some investments I will make won’t do well.
But I don’t know which ones they will be.
I expect interest rates will rise. Probably not for a number of years. In fact, I don’t know when.
And I expect another world financial crisis and probably another pandemic.
But I have no idea when these will come.
Now these are not contradictions or a form of cop-out
As I said…there’s a big difference between an expectation and a forecast.
An expectation is an anticipation of how things are likely to play out in the future based on my perspective of how things worked in the past.
A forecast is putting a time frame to that expectation.
Of course, in an ideal world, we would be able to forecast what’s ahead for our property markets with a level of accuracy.
But we can’t because there are just too many moving parts.
Sure, there are all those statistics that are easy to quantify, but what is hard to identify is exactly when and how millions of strangers will act in response to the prevailing economic and political environment.
Then there will always be those X factors that crop up.
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Those unforeseen events that come out of the blue, which could be local or overseas that undo all the forecasts we made.
Just look at the major events that have rocked our world in the last few years that no one could foresee coming.
- Remember the terrible, tragic bushfires in Australia.
- The spread of Coronavirus from China around the world leading to a pandemic and a recession in many countries, that no one could foresee
Then look at the positive X factors:-
- The unprecedented economic recovery last year- NO ONE predicted that!
- Or the property boom in most parts of Australia over the last year, with 20+ percent growth in the value of many houses around Australia – nobody really saw that coming.
So what should you do about this?
I’ve found the most practical approach is to have expectations of what could happen without specific forecasts.
That’s because when you expect something to happen at some stage in the future, you’re not surprised when it happens.
Expecting the worst while preparing for the best forces you to invest with room for error, and psychologically prepares you for the inevitable disappointments.
This is exactly how I planned for the property downturn of 2018-19 and why I was prepared for the recession of 2020.
I didn’t know when the property downturns would come, how long they would last, or how they would affect the value of my property portfolio or the cash flow of my business.
But I knew a downturn would come once again, and I was prepared for it with cash flow buffers to see me through the difficult times.
What I’m trying to explain is that there’s a huge difference between, “I expect another next property downturn sometime in the next decade” and “I expect the next property downturn in the second half of 2023.”
One of the big differences is how I invest
If I expect the property upturn we’re currently experiencing will be followed by another property downturn, then I won’t be surprised when it comes.
But since I don’t know when this will happen, I won’t make the focus of my property investing trying to time the property cycle.
That’s because trying to time the property cycle or looking for the next “hot spot” are two of the reason many property investors fail.
On the other hand, strategic investors maximise their profits during property booms and minimise their downside during busts by investing in assets that have “always” worked, rather than looking for the next hot spot or for the type of property strategy that works “now.”
They own investment-grade assets in investment-grade inner and middle ring suburbs of Australia’s three big capital cities.
The type of property that keeps growing in value over time without fluctuating wildly in price when the property cycle slows down.