Every now and then, little voices start talking to me. They tell me exciting things, but I’m a bit scared to listen.
“Property, Debt Man, pin your ears back!” a ghost-like voice has suggested in a sultry tone recently.
Almost instantaneously, I hear a second voice. And, inevitably, it’s arguing with the first voice.
“Have you forgotten, already, the global debt crisis?” Voice 2 snaps back.
Sure, these are symptoms commonly associated with being mad, drug-affected, schizophrenic, or suffering from early-onset dementia. I don’t believe I’m any of those. But those voices have been getting louder. And they’re fighting, like the devil and angel, in “National Lampoon’s Animal House”.
The argument going on in my head is essentially this: “Has property bottomed? Is property cheap?”
I can’t say for sure.
But I do know that property has been in a funk for quite a while, depending on which set of stats you subscribe to. And I’m a huge fan of “reversion to mean”, a theory that says everything will, eventually, come back to its average growth rate. I’m also an enormous fan of property as a long-term investment, which you’d expect, given I’m the author of three books on the topic.
Nationally, property prices peaked in 2010. They’ve done sod all since, though it depends on which part of the country you’re focusing on. Perth went for proper gallop starting in 2002 through to 2006, but has been reasonably flat since. Roughly, it coincided with the best of the resources boom.
The rest of the country peaked a little later, in, say, mid 2010. Since then, it’s been a bounce here, a tumble there.
There hasn’t been a lot of action in the property market for nearly three years. Most state capitals have done something between holding stable, sliding a bit and sliding a little bit more than that.
However, take into account inflation and EVERYTHING has gone backwards in the last couple of years. It’s just a matter of how badly.
If you believe in economic and investment cycles, then it’s time to look at the investment or economic clock. Now, where is property in that pretty graph?
Let’s tick them off. Start at 6 o’clock. Falling real estate values, tick. Falling interest rates, tick. Rising share prices, tick. Rising commodity prices, um, tick.
If we’re not actually at the point of rising real estate values, then it would appear that we’re not far off midnight …
… If you believe in a stupid clock. That clock is the creation of generations of economists. And we know that economists make weathermen look like Nostradamus.
But economic cycles exist – just not as perfectly as that. Property yields have been fattening. Interest rates are historically low. Equities have been doing their thing, beautifully I might say, for about nine months now.
Australia’s economy is strong. Company profits are stellar (though some parts of the economy are soft). Unemployment is low.
Why wouldn’t property be ready to roll? And why shouldn’t you be on it?
If you’re naturally conservative, then I’ll give you the completely acceptable out. The same rules apply for investing in property as have always applied.
Property is a high-risk asset class. It’s prone to tanking, like the Melbourne Football Club, and to going on “inexplicable” spurts, like Essendon.
I think property is primed for recovery. (And I’m going to put my money where my mouth is.) But should you hock yourself to the eyeballs to get on board?
Property certainly doesn’t have the volatility of shares, but it’s even more certainly not the safe, boring, predictable asset class that cash and bonds tend to be.
Direct residential property requires serious gearing. You can’t buy a little bit of an investment property (well, you can, if you purchase with others, but that’s introducing new risks of dealing with even less predictable fellow investors and family members).
The outlay is in the hundreds of thousands of dollars. And most of that, generally, needs to be borrowed.
The costs of getting into property (stamp duty) are extraordinary in Australia – north of 3.5 per cent in WA. The costs of getting out (agent’s fees and advertising costs) are not dissimilar.
But … with property prices, the stars seem to be aligning.
And that clock seems to be ticking towards midnight.