Two words: Mean reversion.
That means almost everything will go back to their long-term averages, no matter how out of sync they might become temporarily.
The naughty child who starts actin’ all sweet as pie will eventually go and whack someone. Charlie Sheen, bless him, is possibly only ever one day away from getting back on the “Charlie Sheen drug”.
Mean reversion also suggests you can’t keep a good thing down. Property – despite the inevitable droning of naysayers – is a good thing. And the average returns for property are around 7-10 per cent (which includes rents).
Over time, property prices rise. Have done since humans stopped building shacks themselves and started buying ones already constructed by others.
But property has been in a funk. After peaking nationally in 2010, property prices fell gently through 2011 and 2012.
Every region has its quirks. But let’s say the average fall was 10 per cent. Add in a few years of inflation at 2.5 per cent. In real (inflation-adjusted) terms, property prices are more than 15 per cent lower than they were three years ago.
Then we’ve got interest rates in the bargain basement, reasonably low unemployment, an economy which is still the envy of most of the world …
As much as I hate crystal-ball gazing, yes, I believe good residential property is underpriced. I think we’re likely to see continued growth over the next 12 months, probably longer.
Not every property. Rubbish property is still rubbish property, and always will be.
On balance, I’d be a buyer of residential property now, rather than a seller.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and principal adviser with Castellan Financial Consulting.