With property it pays not to follow the crowd

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If you’re a property investor who keeps their eye on the market, then you would’ve noticed that many of our major property markets are on the move.

You’d have to be either asleep or out of the country not to have seen the news plastered all over the press depicting some of our capital cities as too hot to handle and, possibly, you’re just becoming alert to what appears to be a fading opportunity to get into the market, and fast!

Recently, we’ve been seeing some pretty impressive figures released in terms of house price growth, with most capital cities having experienced some of the best growth they’ve seen for a while. Last year, investors were incredibly bullish and stayed out of most of the inner ring suburbs, while this year they’re racing each other to the finish line, creating demand that’s outstripping supply.

When you think about it, it makes no sense to stay out of a decent market just because no one else is buying there, and then rush in when you experience an emotion my children seem to know very well – FOMO. FOMO simply means Fear of Missing Out, and everywhere I look today I see property buyers bidding as if the world is coming to an end and property is about to blast off into the stratosphere, where it will never be affordable again.

Affordability is still relative

I recall at 21 years of age being pressured by my father to buy a property before it was too late. I purchased a modest one-bedroom unit in Cabramatta for $28,000. My wage at that time was $5,700 per annum and so I was paying roughly five times my wage to buy this property. This same property would sell for around $220,000 today, and with the average wage around $1,200 a week, well, it’s just as affordable now as it was then.

And so it would seem that once you take out the highs, created during times of buyer frenzy, and the lows, when everyone is too frightened of something going awfully wrong in the property market to buy anything, things remain pretty much the same and affordability, though it ebbs and flows, seems to remain relative most of the time.

And so to my point – if we take from history the lesson that property buyers will buy property that is affordable to them given their wage level, and property is pretty much going to remain at a price where it will continue to change hands, then what we should be able to see is that market timing is everything and is, as it has always been, the most critical part of buying property well.

Get that market timing right, and you can buy before an area becomes a hotspot, and enjoy the benefits that solid growth can bring. Get it wrong, and you’ll likely join the ranks of those who claim that you can’t make money from property (failing to see that it was actually you who didn’t make the money, because you didn’t do it well!).

Stay away from the heat

Which leads me to my next point! Now may not be the right time to be buying in markets, which are buckling under the weight of buyer activity, achieving impossible to sustain sale prices and building into a pressure cooker likely to blow sooner or later.

I am not suggesting that buying today in Sydney, Perth and Brisbane won’t make you money – the upward trend is far from over, and while you won’t make as much money as you would had you bought last year (when I suggested time was right to buy), you may still see some growth.

The problem is that you are unlikely to get out of that market before it has its correction – it will either be too short a period for you, you cannot sell quickly enough or you just won’t see it coming. Again, this may not be a problem if you can ride the downturn and wait for the next upswing, but if your individual investing timeframe requires selling in the foreseeable future, then I’d be staying out of these overheated markets.

As with all investments, it all comes down to your capacity to withstand loss and the period of time after which you will need to liquidate to access funds for retirement. If you have a long time period in which to invest, then jumping into a buyer frenzy may be acceptable, as a correction can be ridden through until the next upswing.

But if your time frame is more prescribed, stick with predictable markets, where there are fewer buyers pushing up prices and creating a stampede of people experiencing FOMO. Find areas where families are moving, where infrastructure is ramping up and where diversified employment opportunities exist, and go for low-priced housing in strong communities. Such property usually has a far less volatile performance and often shows a better overall growth in the medium term.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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