Do you understand the best way to invest in a rising property market?
As it currently stands, our capital and regional cities are primed for growth over the next year or two.
There is no doubt most property markets and properties will do well over this period.
But what happens when the cycle moves on?
Well, it was John F Kennedy who coined the headline phrase back in 1963 in relation to an improving US Economy.
But it is perhaps the addition to that phrase, credited to Warren Buffet, that may have help us with the answer to the question of what happens next.
……. only when the tide goes out do you discover who has been swimming naked.
While the next few years may be prosperous for many property investors, it is what happens beyond this cycle that will become crucial.
Here are my thoughts
Short term focus
The good thing about getting in at the bottom of another cycle is that your chances of your property growing in value is relatively high.
The problem is that people only focus on the short term and getting into the market, so they receive the benefit of capital growth.
Their investment runway is being cut short as their vision is not extended beyond the next few years.
As a result, they are sucked in by the latest news headline or the next potential “hotspot”.
They look at short term data like median house prices, auction clearance rates and vacancy rates or the last 3 years of growth to make their decision.
This data can change from week to week and is not as reliable as longer-term fundamentals like wages growth, incomes, supply and demand and historical growth.
The problem is many investors chose a property or location first and then search for the data to support their decision.
As we know, you can always find data or an opinion to support your viewpoint by doing a quick search.
So one could argue it is far from analytical research.
What happens next?
Property prices will not continue to rise at such a rapid rate.
As a part of any normal property cycle there will also be a downturn in our property markets.
But in a rising market and in the heat of the moment, this can often be forgotten.
And this is usually when you discover who has been swimming naked.
The investors who have put the property ahead of any real form of research or critical analysis.
We see who has taken shortcuts, bought emotionally or purchased on a gut feel rather than prioritising the fundamentals and followed a logical process.
In our bigger capital cities, well located properties with strong, long term fundamentals could retract anywhere from 0% - 5%, in superior areas it softens but rarely drops.
Secondary locations including smaller capital cities and regions will usually come back somewhere between 5 – 15%.
While outer locations where, I suggest buyers have been more speculators than investors, could fall significantly more.
A tale of two cities
Perhaps a great example in recent times to highlight these points is to look at the Perth and Sydney Property markets.
Rewind back to 2007 and a fast-rising tide (mining) was lifting Perth property prices to record levels.
So much so, that at one point in that year, Perth’s median house price was on par with Sydney.
In the latter part if the cycle, there was the usual short cuts and fear of missing out leading to emotional and careless decisions.
It is what happened next that highlighted the importance of sticking to a process and prioritising property fundamentals.
As we now know, Sydney prices went on to double while Perth prices initially fell before trending sideways for the best part of a decade.
It was in the more volatile regions further out though where the real pain was felt.
Speculative areas like the heavily mined Pilbara region saw property prices free falling from $800,000 to less than $300,000.
Here we are in the early stages of another rising property market.
The current market tide will certainly lift our property market causing prices to rise.
Property commentators and spruikers are having a field day using irrelevant data to convince investors that a “property” or certain location is the way to go.
Some investors buying on a whim and with emotion buy into this and think that any property will likely do well in the short term.
They do very little research and any data they do analyse is more to look for a reason to confirm their already made decision.
These investors do not understand that they are likely making a medium to long term decision based on the immediate short term.
They should be looking to make the decision as part of a structured, longer term plan to ensure the property moves them closer to their longer-term goal.
Understanding their reason for investing and then understanding longer-term fundamental data should be a priority.
Then, in the downturn phase, your chances of values falling substantially are very low and values will recover quicker to build wealth faster.
Following a process is critical otherwise, you may be caught swimming naked once the tide goes out.
Brett Warren is a director of Metropole Properties in Brisbane and uses his 18 plus years property investment experience and economics education to advise clients how to build their portfolios.
He is a regular commentator for Michael Yardney's Property Update.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.