In today’s technology age, property forecasters are armed with all of the information in the world.
So why do they keep getting property market predictions wrong?
That’s one of three topics I’ll be discussing in today’s show.
I’ll also be talking about some recent statistics that explain a segment of the property market that you really want to avoid.
This is one area of the property market just doesn’t work.
Additionally, in today’s mindset moment, I’ll talk not about being successful, but about why you should embrace failure.
You've heard me say it before, but now the stats prove my point.
Off the plan apartments make terrible investments!
Analysis by BIS Oxford Economics reports that of the apartments sold off the plan during the past eight years:
- Two out of three Melbourne apartments have made no price gains or have lost money upon resale. And this is despite record immigration and a significant property boom.
- In Brisbane about half these apartments bought off the plan are selling at a loss, or at no profit.
- In Sydney, it is about one in four apartments bought since 2015 are selling at a loss, or at no profit.
In other words, more investors in off the plan high rise apartments have lost money than have made money.
And of course, there are all those investors sitting on the apartments which are continuing to fall in value, but they haven't crystallised their loss yet.
In 2018, 98,000 apartments were completed across the country and 65,000 in NSW alone, according to ABS figures and the situation is only likely to worsen considering the pipeline of projects still being completed.
According to the BIS research, resales of apartments within a three to five kilometre of central Sydney, Melbourne, and Brisbane have realised consistently lower prices than established apartment resales.
To make things worse...
Today with falling property values a large portion of these off the plan apartments are completed they are valuing in at less than contract price at a time when nervous lenders are demanding a bigger deposit from buyers.
This double whammy will result in more off the plan investors having difficulty settling their purchases leading to rising defaults on settlements and major discounting by investors trying to get out of their purchases and developers trying to move their stock.
According to RiskWise, Brisbane's inner-city apartment market has about 10,000 more homes in the pipeline than it should have, suggesting the city is expected to face more defaults on settlement.
And there are long term problems as well...
There is no doubt that all those off-the-plan residential property developments have redrawn the skylines of our capital cities and many parts of inner and middle suburbia over the past decade.
The spread of high-rise living out of our CBDs to adjacent suburbs as well as into outer lying suburban strips has been remarkable.
- Many of the tiny inner-city apartments built during the boom of the past decade are unlikely to meet the needs of Generation Y as they grow older. Sure more and more of us want to live in apartments - but not ones that are so small and ones that lack amenities
- Poor construction techniques, particularly the use of inflammable cladding, will devalue many apartment blocks. The high-profile structural problems of the Opal Tower is likely to be only one of many stories of building defects
But the biggest risk for off-the-plan units are the proposed changes to negative gearing and capital gains tax if Labor wins government.
If they’re armed with all the research available in today’s information age, why can’t economists agree on where are our property markets are heading?
In fact, a better question would be – why do so many get it wrong?
The simple answer is that market movements are far from an exact science.
The fundamentals are easy to monitor.
Things like population growth, supply and demand, employment levels, interest rates, affordability, and inflationary pressures.
However, one overriding factor that the experts have difficulty quantifying is investor sentiment.
And that’s what’s really been behind market movements of late.
I’ve found that investors often suffer lapses of logic when investing and many of their investment decisions are driven by emotion.
For example, we tend to extrapolate the present in the future.
When things are booming, we tend to think the good times will never end and when the market mood is glum, we have difficulty seeing the light at the end of the tunnel.
Think about it…when the media is full of reports about property prices falling and an impending housing crash, many investors become scared and sit on the sidelines, believing the end of property is nigh and things will never improve, when in reality much of the risk has been removed from the market.
Conversely, when property markets are booming and stories of investors seemingly making large gains overnight abound, people want to jump on the bandwagon and cash in, often at a time when the market is near its peak.
Other emotional traps include becoming overconfident, wishful thinking and ignoring information that conflicts with your current views.
In other words, many investors make their own “reality.”
Can you see how investor psychology, drives booms and busts?
Can you see how the dominant investor mentality of the time helps drive the property cycle?
Just to make things clear…homebuyers, who make up around 70% of property transactions drive our property markets.
But investor activity creates our booms and busts.
Simply, a few years ago investor frenzy driven by Fear of Missing Out drove the property markets in Sydney and Melbourne to dizzy heights.
Now that investors have put on the brakes, property values are falling. But in due course, they’ll jump back into the market, demand will rise and so will prices.
Obviously, one or two misguided investors won’t be able to influence property prices, but investor psychology is infectious.
People tend to want to do what others are doing - they ‘follow the herd’ because going against popular opinion is perceived as risky.
What if you make a mistake? What if “the crowd” is right and you are wrong?
This behaviour stems back to the days of our ancestors when it was safer to remain part of the herd rather than leave the security of the pack and be eaten by a Saber-toothed Tiger.
This “herd behaviour” is magnified by several things including;
- Mass communication and social media bombarding us with messages and facilitating behaviour to become infectious. When we hear that real estate is doomed, all but a handful of sophisticated investors get scared out of the game. And when the media tells us our property markets are booming, everyone wants a piece of the action.
- Pressure to conform. If your friends or family are doing it, it must be right. Right? Human nature makes us reluctant to do the opposite of what our peers are doing.
- A general belief that grows and spreads. Every cycle there is a new generation of uneducated investors who have not experienced the cyclical nature of our property markets and they are (mis)led to believe that property values can only go one way, and fueled by property marketers and spruikers they enter the market pushing up prices, perpetuating the belief and helping make it a reality! Similarly, when the herd believes the market is going to crash, they steer clear, this gets reported in the media and the negative sentiment feeds on itself.
These “lapses in logic” by individual investors and the magnification of such lapses by crowd psychology feeds property cycles and goes a long way in explaining why we’re experiencing the current property slump, despite the strong underlying fundamentals.
When investor sentiment is positive, the crowd jumps in feet first, pushes up demand and places upward pressure on prices – causing boom conditions.
Conversely, when sentiment is negative, the crowd backs off and frequently sells out of the game due to concerns that they’re about to lose everything – causing slumps or bust conditions in the marketplace.
The best defence is to be aware of past market cycles (so nothing comes as a surprise) and to avoid being sucked into booms and spat out during busts.
Of course, for those with a long term perspective, and that’s the only way to invest, buying property today when others are fearful is a smart strategy.
I’ve always been an advocate of counter-cyclical investing.
This approach is commonly taken by savvy investors who have come to understand that moving against the crowd often produces the best results and can mean the difference between outstanding gains in the property market and average ones.
Sure, it takes some courage to do the opposite of what everyone else is doing, but the results of your contrary behaviour will ultimately speak for themselves.
Links and Resources:
Some of our favourite quotes from the show:
”Flats, the older apartments, the established apartments, have perfromed better than new apartments.” –Michael Yardney
“But here’s the thing, we’re all going to fail at some point, whether it’s a succession of small errors or one monumental disaster.” –Michael Yardney
“Nothing puts things in perspective or keeps our egos in check quite like a run of bad luck.” –Michael Yardney
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