« Back to Blog
Key Lessons All Property Investors Must Understand
December 15, 2015
I’ve learned many lessons over the 40 years I’ve been investing.
In fact, I’ve learned more from the many mistakes I’ve made than from the things I got it right (now there’s a powerful lesson in itself!)
But there are 4 key lessons I wish I’d learned earlier.
- Firstly, the economy and our property markets move in cycles.
And the main cause behind them is that we’re human and tend to share the general optimism or pessimism of others.
While it’s often said that property cycles last 7 years, there’s no fixed length of time between one cycle and the next. They’re affected by a myriad of social and economic factors and then, at times, the government lengthens(or shortens) the cycles by changing economic policies or interest rates.
I’ve also found that investment markets often “overshoot.” That is, they move by more than changes in the fundamental influences would seem to require – on the upside as well as the downside.
- The market is usually wrong about the stage of the cycle.
“Crowd psychology” influences people’s investment decisions, often to their detriment.
Investors tend to be most optimistic near the peak of the cycle, at a time when they should be the most cautious and they’re the most pessimistic when all the doom and gloom is in the media near the bottom of the cycle, when there is the least downside.
Market sentiment is a key driver of property cycles and one of the reasons why our markets overreact, overshooting the mark during booms and getting too depressed during slumps.
Remember that each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.
- There is not one property market
While many people generalise about “the property market” there are many submarkets around Australia.
Each state is at a different stage of its property cycle and within each state the markets are segmented by geography, price points and type of property.
For example the top end of the market will perform differently to the new homebuyers market or the investor segment or the median priced established property sector.
And while at any time there are hundreds of thousands of properties for sale in Australia, most are not what I call “investment grade” properties.
- We need to allow for the X factor
When I mention ‘the X factor’ most people they think of the talent show on TV. However, ‘the X factor’ is also talked about in the less glittery world of economic forecasting. Economists refer to ‘the X factor’ (or sometimes the black swan event) when an unforeseen event or situation blows all their carefully laid forecasts away.
I first came across the term “X factor” many years ago when distinguished economics commentator, Dr Don Stammer, used to try and predict it for the forthcoming year in the January edition of BRW magazine. Of course, by definition the X factor is unforeseen, so you can’t really predict it.
But it was a little game he used to play and then review his prophecy 12 months later. And it is a game I also took up many years ago and have had fun with over the years. Of course the X-factor can be negative (the aftermath of the Global Financial Crisis of 2008) or positive (the China driven resources boom of 2010-12) and it can be local or from abroad (the US subprime mortgage crisis of 2008.) These X factors affect the economy at large, which of course affects our property markets, but our property markets also have their own specific X factors – unforeseen events that affect the best laid plans and predictions.
The lesson is while it’s important to take a long term view of the economy and our property markets, you also need to allow for uncertainty and surprises by only holding first class assets diversified over a number of property markets and having patience. One of the X factors for 2015 was that interest rates dropped to historic lows. It wasn’t that long ago that economists were expecting a rise in rates by now.
Trying to predict the X-factor is futile: if it’s been predicted, it’s not the X-factor, but let’s have a look at a list of major past X-Factors from Dr Stammer, who now writes for The Australian.
2011 Continuing problems with European government debt
2010 European government debt crisis begins
2009 The resilience of our economy despite the GFC
2008 The near-meltdown in banking systems
2006 Big changes to superannuation
2004 Sustained hike in oil prices
2001 September 11 terrorist attacks
Now it’s your turn to play the game and predict the coming year’s X-Factor.