This is the right time to remember the roller coaster of investor emotions

Emotions are running high at the moment aren't they?

Australia is in a recession, there's a world wide pandemic, international geopolitical tensions are high.

It's hard not to get caught up in the emotional turmoil considering we are continuously bombarded with bad news by the media.

Messages like job losses, businesses closing down, a second wave of corona virus, China hacking our computers.

All this makes us scared and wonder whether things will ever recover.

However, as I've written before, this too shall pass.

In the meantime while emotion has its place in everyday life, it should not have a place when it comes to investing.

You'll find various examples of the following chart all over the Internet showing the rollercoasters of investor emotion over an investment cycle.

 

 

It is well known that markets overreact in both directions – both up and down - significantly more than is justified by fundamentals alone.

Remember a few months ago when the sharemarket collapsed - it was not really a sign of the true value of the underlying companies.

It was not a reflection of profits, dividends and interest rates. The fall in stock prices was because investor emotion plays a huge part.

What about real estate?

Our property markets are not as emotional as the stock market, because they are underpinned by the fact that 70% of properties are owned by homeowners – owner occupiers - who are not likely to sell.

One of the major lessons I have learned from previous downturns is the importance of taking a long-term perspective which always outsmarts short-term reactive thinking.

You see... it’s always property fundamentals that really matter and drive our markets in the long term.

Things like demographics, supply and demand, affordability, availability finance, and local economic trends.

Of course, we all know the old saying, be fearful when others are greedy and be greedy when others are fearful….

But it’s normal human nature to find it difficult to buy your new home or invest when everyone else is running around thinking the world is coming to an end.

However, now that I have invested through 8 property cycles, I have found that it is exactly these conditions the present the best opportunity.

That means now is the time to get prepared to take advantage of the opportunities that the market will offer.

After each global disruption, there has been an increase in property prices, and there is no reason to suggest this will be any different as the fundamentals are still strong;

• Record low-interest rates
• Record First Home Buyer numbers
• High immigration (high demand)
• Slowdown in construction (low supply)

Remember don’t make long-term decisions like buying a home or an investment property based on the last 30 minutes of news.

There is no doubt there will be opportunities in the market for those who are willing to go against the crowd and when they look back in a year’s time and definitely in 5 or 10 years’ time, they will remember the unprecedented events of 2020 as a great buying opportunity for property.

Just as happened in all the other crises you'll see in the chart below.

Timing is hard

Is now a good time to buy property? Should I hold off and wait for property values to fall further?

• Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
• Also read:This week’s Australian Property Market Update – Latest Data, State by State April 23rd 2024
• Also read:Melbourne property market forecast for 2024
• Also read:Brisbane’s property market forecast for 2024
• Also read:Sydney property market forecast for 2024

The temptation to time markets is immense.

But look how well that worked for people who tried to pick the bottom of the property market in 2019 just last year – they all got it wrong didn't they.

And at the same happened every other time at the markets had a downturn - whether short or long lasting.

Of course the signs are easy to see in hindsight, it just doesn't work that way in real time does it?

And the main reason is those basic human emotions of fear and greed. Just look back at the first graphic in this blog.

While I don’t want to make light of COVID-19 and economic hardship our forced closures are bringing on many people and businesses, based on my perspective having been involved in the property market for over 45 years, I believe the impact of this on our property market will ultimately be temporary.

What we are currently experiencing is like a terrorist attack which will deliver a short sharp blow to our economy rather than experiencing a long drawn out war.

What will happen to our property markets will depend upon how bad any second wave of Coronavirus gets, how soon our economy picks up, the level of unemployment and importantly the level of consumer confidence coming out of our recession, which will be a good barometer of all the above factors.

Fortunately our Federal government has learned a lot about handling monetary and fiscal policy during economic downturns resulting in the slashing of interest rates, the introduction of Quantitative Easing and spending billions of dollars to build a bridge to get us through this and will no doubt have spend a lot more to kickstart the economy.

At the same time the State governments have introduced their own support and stimulus packages.

Sure, unemployment will rise to double digits and unfortunately some businesses will not reopen, but the economy is likely to rebound in the 4^th quarter of this year or early next year at which time we are likely to be experiencing a resurgence in  our property markets.

Now, this view may be a little different to what others who are forecasting that property values will drop anywhere from 20 to 30 percent; but remember …this too shall pass.

What does this mean for property prices?

In the short term:

• “Investment grade” properties and A grade (above average) homes could fall in value by around -5%
• B grade (average) homes could fall in value by up -10%,
• C grade (less than perfect) will be the hardest hit as there will be a flight to quality.

But this will be on a on very low levels of transactions and the pace of recovery from that point will depend on the state of the wider economy.

The worst affected residential markets will be:

• Apartments in high-rise towers – in fact this is these properties are likely to be out of favour for quite some time.
• Off the plan apartments and poor quality investments stock (as opposed to investment-grade) apartments, particularly those close to universities.
• Outer suburban new housing estates house and land packages, where young families are likely to have overextended themselves financially and with many people will be out of work for a while
• Properties in the blue-collar areas.

While property prices should remain resilient, our rental markets are suffering, mainly because many of the people that have been laid off their jobs are younger people who currently rent rather than own properties.

Similarly, the lack of immigration and short-term Visa migrants including students, is increasing vacancies in our in the CBD rental market

On the positive side, households and property investors whose incomes remain stable and secure will be able to take advantage of historically low interest rates.

This should support a return to stronger levels of price growth in the medium term.

So rather than trying to time the market, if you have a secure job and the long-term outlook…

Now is the time to take action and set yourself for the opportunities that will present themselves

If you're wondering what will happen to property moving forward you are not alone.

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