I expect that the current adjustment phase of the property cycle to come to an end at which time I expect the value of many properties to increase again.
I have no idea when this will happen.
Now just to make things clear...those aren't contradictory statements.
The first is an expectation, the other is the rejection of a forecast.
And if you want to be a successful property investor, you’re going to have to understand this important difference.
It's one thing to look at history and see that the property market cycles with some frequency and then form a baseline of what to expect in the future with this knowledge.
However, it’s quite another thing to predict the precise timing of the turning points in the property cycle.
And it's another thing entirely to devise a strategy that reacts to those predictions.
Yet some people believe they can predict markets and they tell you about (or sell you into) the next property “hot spot” or currently there are those telling you not to invest at all because we're about to go have a real estate crash.
There's an important grey area, which is expecting certain events to occur without having an opinion on exactly when, where, why, or how.
I’ve been investing for almost 50 years now and in that time there have been 8 significant property cycles.
I can use this as a very rough rule of thumb for the future, based on the idea that despite the challenging times the Australian economy is going through at present we've got even more positive fundamentals to drive our property markets than past generations had.
While there are many sound fundamentals underpinning the long-term prosperity of our property markets, two of the big ones that give me comfort are the significant population growth that we will experience over the next decade and the increasing wealth of our nation.
Sure the RBA is raising interest rates to slow down inflation and this will in turn slow down our economy.
But currently, we have a shortage of properties that have created a rental crisis, and unemployment levels are at record lows.
So we have opened our borders and are encouraging selective immigration of people who bring money into our country and who can do skilled jobs and pay taxes.
And despite the headwinds we'll experience, there are many other strong fundamentals underpinning our housing markets
- There is a shortage of good properties for sale and virtually no properties to rent.
- As I mentioned, international immigration is picking up and this will increase the demand.
- There is little new construction in the pipeline – we’re not building enough dwellings and increasing construction costs at a time of a shortage of labour means the end value of new projects will need to be up to 20% higher to make projects viable for developers.
- Unemployment is at historically low levels meaning anyone who wants a job can get a job (so they'll be able to pay the mortgage repayments.)
- Wages are starting to grow.
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- Household balance sheets are strong - we have a ‘natural buffer’ with $250- $260 billion in aggregate savings nationally.
- Many borrowers are ahead in their mortgage payments - Matt Comyn, chief executive of Commonwealth Bank recently said that three-quarters of their loans are approximately two years ahead on repayments.
- We have a strong banking system that has been strict in its lending criteria, meaning there are very few non-performing loans.
- There are still Government incentives to encourage first-home buyers into the market.
And over time our increased prosperity and the Aussie dream of owning our own home will ensure that the value of well-located properties will keep increasing.
These factors reassure me that my long-term plans are sound and based on what has always worked – rather than trying to pick what is right for the current market.
If I plan on investing for the next 30 years, I should count on things getting ugly at least another six times.
Maybe it'll be a little more, maybe less.
But I have an expectation, a rough idea of how the game works.
Yet it's not a forecast.
A forecast is, "The property market will turn in the second half of 2023” or “Australia will have a recession in the first half of 2024."
That's precision, with a disregard for both the history of people making such forecasts and the events that cause these turning points which, a lot of the time, is something that can't be foreseen.
The important difference between an expectation and a forecast is the impact it has on my behaviour.
If I expect property booms and property downturns I won't be surprised when they come.
I know they're a normal part of the game.
But since I'm not sure when they will come, I won't attempt to do much about it.
Attempting to do something about it – trading, timing, buying and selling – is the root of most investors’ mistakes.
A forecast suggests that you know when something will happen, which is permission to act on it.
There's little reason for a forecast other than acting on it.
- The false hope of knowing exactly when the property market will turn. Even the experts keep getting their forecasts wrong.
- The high probability of regret from trading around these forecasts. Just see the results all the hot spotters have achieved or the lost opportunity for those who tried to time the market.
In other words…
Expectations rather than forecasts make me a better property investor.