Why counter-cyclical property investors win over the long haul

Everyone has an opinion on investment markets, whether substantiated or otherwise, and often opinions are highly charged, for these are emotive subjects.

I recently wrote an article which suggested that over the long term the most rational proxy for property price growth in Australia is the growth in household incomes.

Even the greatest investors in the history of the world including Buffett and Graham have noted that it is impossible to anticipate what investment markets will do over the short term.

Amazingly, though, it seems there are dozens of everyday Aussies on chat forums who can!

Of course I acknowledge that I don’t have a clue what will happen to Australian housing or share markets over the next year or two, but I do apply rational logic to the long-term future for Australian housing – the further out you draw that line, the more likely it is that dwelling price growth will begin to mirror the movement in household incomes. The more people have to spend, over time the more they will spend.

And household incomes have grown very strongly in Australia over the last two decades. People try to draw all kinds of clever inferences, but the stats are right there in black and white in the ABS figures: a sustained and very strong growth in average Australian household incomes.

Spruikers and latent bulls
These days it seems that practically anyone who predicts anything other than an enormous crash for Australian property is immediately labelled “a spruiker”.

Contrary to what some may think, I’m not a spruiker. In fact, I’m a near-fanatical and obsessive student of economic and investment market history. I have no interest in talking up (or for that matter down) investment markets for the sake of so doing and I’m most certainly not arrogant enough to think that my views make the blindest bit of difference to any major asset class.

Rather, I simply aim to call things as I see them. In Australia, as noted above we have seen very strong household income growth over the last two decades which has been twinned with a structural shift in interest rates from the nosebleed levels of 17% down to a historic low of a cash rate of just 3.00% today.

On that basis, I don’t find it at all surprising that properties in the popular supply-constrained suburbs of our major capital cities are not cheap.

I would classify a “spruiker” as someone who makes statements such as “property always goes up by 10% per annum” and then tries to sell you a property on that basis.

Incidentally, there are blogs in the internet which are blatant “circle-jerks” for exactly the opposite type of person: the latent bull. A “latent bull” is someone who wants property prices to crash so that they themselves can buy a house at a cheap price and then profit when prices return to growth.

There are a lot of similarities between spruikers and latent bulls for they both choose information selectively to support their preconceived notions and ignore any data which contradicts their preconceived view.

Oh, Melbourne. In response to the article I referred to above, one reader opined that I did not foresee Melbourne’s housing “tanking” by 2.9% in 2012. Regular readers of my blog will know that I actually am not at all surprised that Melbourne’s property prices slid through 2012 following the sharp run-up in prices in the period to 2010.

I would, however, note that it is not possible for any market to “tank” by 2.9% (if they could our share market would be tanking on a day-to-day basis surprisingly regularly) for this is a clear misuse of the term.

I’m sure most investors who bought property in Melbourne before the boom would be pretty happy with their outcome. If anything the surprising thing to me was the level of resilience the market showed through 2012. Investors in investment-grade properties in quality suburbs probably barely saw prices shift at all during the year.

In any case, I don’t need to write a long article about the fortunes of Melbourne property over the past 6 or 7 years, because it has already been done in this excellent article by Christopher Joye here. In particular note what Joye says about the clear link between property price growth and that of household incomes!

Why counter-cyclical investors win
Anyone who has studied the history of investment markets knows that the valuations of stocks and real estate periodically become severely over-valued and at other times under-valued.

Sentiment swings between irrational exuberance and despondency in cycles, and against the predictions of many behavioural economists, humans don’t appear able to learn from previous cycles at all. The madness of crowds persists.

Smart investors simply aim to acquire assets counter-cyclically in markets which have not experienced recent booms, and they usually attempt to acquire assets at great prices when sentiment is unnaturally despondent.

For mine, I bought shares in some of Australia’s large-cap blue-chippers (the names of whom I can’t say lest it be construed as financial advice) in recent years as they had single-digit PE ratios.

History shows that periodically share markets will reflect values twice as high as those levels, and when they do, I will look to sell. In the meantime, quality companies continue to generate profits and pay dividends which exceed today’s rate of inflation.

I also continue to own investment properties in quality inner suburbs of Sydney because I believe that over the next few decades they will increase in price as indeed they already have to date. Household incomes will grow and so will the Australian capital city population.

I own properties in the south-east of England, which is forecast to have a property shortage, for similar reasons. I sometimes do hear triumphant comments to the tune of “you must be devastated by the property crash in the UK?”

Not really.

My missus, like myself, is a Pom, and bought her first house in a quality inner-city suburb more than 15 years ago now for £72,000. Sure, prices in some outlying and regional markets corrected, but her house is probably worth 4-5 times that purchase price figure today.

Even if property prices did fall by a further 80-90% (don’t laugh, I heard that opinion bandied around plenty through the financial crisis) she would still be the owner of an asset with a trifling mortgage which will continue to generate an enormous positive cash-flow until the day we ain’t chewing up oxygen anymore. Which is a far better outcome than sitting it out on the side-lines and renting would have achieved.

That’s why counter-cyclical investors win.

Incidentally, take a wild guess what people were saying about house prices in south-east England of £70,000 back in the mid-1990s?

You guessed it.

“It’s unsustainable. You’re mad to pay so much for a townhouse. House prices are in a bubble. Markets will crash. You’ll be mortgage to the hilt. I’m going to rent for the next few years…”

(Incidentally, property did feel expensive at that time and mortgages were painful to service – and financial success does involve sacrifice).

As Ben Graham notes in The Intelligent Investor, long-term net acquirers of investments see market corrections as great opportunities rather than a time to be fearful (and in fact, through 2009 we did buy more property at around 25% less than previous sales values).

Counter-cyclical investors acquire quality assets when others are fearful and are offloading them at bargain-basement prices. Markets will continue to move in cycles but counter-cyclical investors will always win out over the long haul.



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Pete Wargent


Pete is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. Using a long term approach to building businesses, investing in equities, & owning a portfolio he achieved financial independence at the age of 33. Visit his blog

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