Beware the Bull and Bear

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Beware the Bull and Bear

Australian property market crash

Harry Dent stated last month the Australian Property Market is going to crash – dropping some 50%. We have other property experts insisting some markets are going to rise 30%.

Really?

If I wrote a press release indicating the market in Melbourne would rise 1% to 3% in 2014, no one would blink an eye. Why? Boring but realistic market predications don’t sell papers, don’t sell books, and certainly don’t sell property.

Harry Dent sells books, which means his press releases are marketing. And, he doesn’t even have a good track record of getting it right! His theory revolves around demographic changes and how they relate to the economy. Don’t get me wrong, his books are a fascinating read and something for a well-rounded investor to consider, but not information you should be basing your future financial security on.

Property experts sell property, so their predictions are also just marketing. If you think “Wow! I can make 30% in 12 months!” then you are a dodgy salesman’s dream. The problem with this thought process is in the execution. There is no safe way to go out and make 30% in 12 months. You need to understand this is a risky strategy. And trust me, if someone knows a way to make a 30% return safely, they are not going to advertise it and drive down their own profits.

The truth is, there is so much information and data out there to support either case. And, in isolation, each case looks pretty strong. But the property market doesn’t exist in isolation – there are many factors to consider.

The reality is, since 1890, the residential property market in Australia has roughly doubled every 15 years – that represents a growth rate of around 4%, which, coincidently, is about the rate of inflation.  Property prices have gone up at the same rate – along with the price of the morning paper and the cost of milk. I know this might be hard to believe given how expensive prices have become, but it’s important to understand that, fundamentally, property is just a hedge against inflation.

Many ‘property experts’ think that the property market doubles every 7 – 10 years, but it doesn’t. The real average trend that you can bank on is 4% growth – nothing more.

Your job as investors and our job as advisors is to minimise any downside risk while outperforming inflation. Which is relatively easy once you know what you are doing, have a strategy, and have access to quality research.

Fear and greed are the two biggest motivators, but these emotions should not come into play when making sound investment decisions. There will always be ‘experts’ telling us the market is about to boom and others insisting we are headed for a bust.  As an investor and an advisor, I don’t let these articles stimulate any emotion – they may be interesting, but they should never get you into a state of panic.

The reality is markets can crash, and at some point they will –approximately every 18 – 20 years. But they also recover and exceed previous highs, as they have done throughout history in Australia and everywhere else in the world. This happens as government and the various reserve banks around the world drive up inflation in order to facilitate a healthy and prosperous economy. Like the rest of goods in the economy, land, rent, and property values rise.

If you are a serious investor, you know the best time to buy is after a crash, so in some respects a crash is something to look forward to, not something to be fearful of. Even if you hold existing property, there should be a strategy in place ensure you are protected – after all, the market will bounce back and the only time you loose is if you are forced to sell.

Investment decision should be well planned, well executed, and short term fluctuations should be expected and accounted for as part of your risk management strategy. Good, long-term investment strategies are built to be modest, slow, and boring. If you want to achieve financial freedom you have to be motivated by year on year growth, not by rubbish articles that stimulate feelings of greed and fear.