When it comes to buying assets, some ask if you “should you try to catch a falling knife”? Others recommend waiting until there’s “blood on the streets”.
In investor land, both take balls. It’s buying when all around are too scared to.
Buying when markets have taken a beating, or have slumped, is a gazillion times easier to say than do. It’s like swimming up a waterfall.
But it is how serious investors make their best money. Both in property and share markets.
Perth’s property market has been “up the creek” since late 2013. It peaked at that time, then held its nerve for about 18 months. But since mid 2015, it’s been bouncing, largely downward.
Has Perth’s property market bottomed? Is it safe to look up at the waterfall?
My favourite indicator of property prices is actually a little less scientific. I prefer the measure of “barbeque banter”.
In the last 15-20 years, I’ve learned two things from the conversations I have at parties around property.
First, when property is the only thing anyone wants to talk about, it’s time to step away from investing.
Second is the reverse. When no-one talks about it or is actually talking it down, it’s time to get interested.
What conversations are you having with friends and family about property now?
The people who were late to the 2013 property party are probably hurting right now. High prices then, high gearing and falling rents since makes for a pretty nasty cocktail.
While the recent past has been painful for some investors … let’s focus on now and that waterfall.
Is it safe to leap back into the property investment market?
First, property prices are at their lowest since early 2013. If you then include inflation at, say, 2 per cent a year, you’re taking them back to 2012.
Second, sales volumes are also way off, going back to five or six year lows.
Soooo … prices at five year lows and fewer people are buying property than any time in recent history? Mmmm, prices low, demand low.
For contrarian investors, that’s a perfect recipe. And if you think Perth property is a long-term quality asset class, then it would probably prick the ears of Warren Buffett devotees too.
Is it right for you?
I love property. A lot. It was my first investment love. When I’m unfaithful, I often regret it.
But understand this … while property can be a great asset, capable of delivering fantastic returns, look at the pain it has caused those who bought in 2013 and 2014.
There are three main reasons why.
Property is a “growth” asset. That means capital values can fluctuate (the opposite is an “income” asset, which is largely about the income, while the capital value moves slowly).
While quality growth assets will generally rise in the medium to long term, they can have periods where they stumble and fall.
Direct residential property is also an asset that generally requires massive gearing.
Have you got $500,000 in cash to buy an investment property? No? Well, like most people, you’ll borrow most, if not all, of it, if you have equity in your home.
Gearing multiplies the gains and losses.
If you have tipped in $50,000 to buy a $500,000 property, borrowing $450,000, and property prices go up 10 per cent, your property has increased to $550,000 and your equity in the property has doubled from $50,000 to $100,000.
If the value falls 10 per cent, to $450,000, you have “lost” the initial $50,000 that you put in. The whole lot.
Lastly, property lacks diversification. Most of us can only buy one property at a time. If you buy a rubbish property, or get the timing horribly wrong … it can destroy your finances for a decade.
Sure, Australia’s share market has been on a good run for 18 months. From below 4800 points to, briefly, above 5800 points. Nice if you picked the bottom. And the top.
Hard to do, when millions of identical shares change hands every day and where everyone is comparing them all constantly.
Consider me a contrarian. I like buying straw hats in winter.