I missed ABC’s ‘Betting on the House’ investigation which aired on Monday night. Luckily for me however, the ABC upload their episodes online, so I was able to catch it last night. If you didn’t catch it, click here.
It’s the Great Australian Dream – buying and owning you own home. It’s been an Aussie dream for almost 150 years. Research suggests 44% of Melbournians owned their own home in 1881, with similar rates in Sydney and Adelaide. These figures were unmatched in the developed world at the time. Not much has changed. The great dream however, seems to be slipping away for many Australians – it’s become the Great Australian Nightmare. So we’re being told.
Firstly, I must say kudos to the music director – so very dramatic. I almost lost sleep last night.
The investigation focused on two key areas. 1) speculation and fear-mongering of a permanent property collapse, and 2) speculative and poor decision making by investors.
1. Speculation and fear-mongering
“…the dream run is about to end.”
Markets go through cycles. Periods of high growth are followed by periods of low growth. This is fact, yet we carry on as if we’ve never seen this before.
The investigation reports “…a correction is now inevitable”. Of course, a correction is inevitable, markets don’t rise in a liner fashion. The more you pay for something, the lower the future expected return. The less you pay for something, the higher the future expected return.
Are we going to see future rates of return in the property market like we have seen most recently? Highly unlikely. Are we going to see a free-fall and permanent collapse like the experts are predicting? Maybe. I believe it’s unlikely.
References are made and parallels are drawn to the US property market collapse of 2008. The US property market! Where are you referring to mister property expert? Las Vegas? Chicago? New York? Because if you are in fact referring to New York, property prices fell 13% during the GFC, and are now worth more than they were at the peak of the market in 2007 (almost reminds me of the Melbourne property market actually). The “market” is such a big place, throwing it all into one big bucket doesn’t provide much insight.
2. Poor decision making
The prevailing motivation behind the stories that were shared during the investigation were fueled by greed, and a ‘quick win’.
In two years, Roy Pallesen and Rowena Ebona, who were interviewed during the investigation, bought 7 properties. They did it by leveraging more debt against the rising value of their investments. “Everybody can do it, that’s the thing, and if we can do it and I feel a little bit like Beavis and Butthead, then anybody can do it.” Wow. How do you think this will end for Beavis and Butthead when rates rise and valuations drops? Rates will rise and those who are over leveraged (such as Beavis and Butthead) are certain to face problems. It’s a downward spiral. We don’t have a property bubble, we have a greed and poor decision making bubble.
All the principles that we preach when it comes to investing were thrown out the window during this investigation. Think long-term. Don’t over leverage. Diversify your investments. Invest in line with your goals. Don’t buy property from property developers and mortgage brokers who cold-call you in the evening selling you a “risk free” investment. If it sounds too good to be true, it probably is.
We recently held an exclusive property forum for a small group of clients and investors titled, ‘The Great Property Bubble?’. Speaking at our forum, was one of the country’s most well-respected property experts, Scott Keck. Do yourself a favour. Set 25 minutes aside sometime this weekend, and listen to Scott Keck’s point of view on the situation and make up your own mind (click on the image below).
I don’t believe the market will continue rising in the short-term at the same pace we’ve seen recently. I’m not saying the property market is going to collapse either – although I do believe we’ll see certain areas in the market correcting, precisely like we’ve seen in Perth. Where? I have no idea. When? I have no idea. For how long? I have no idea. How much? I have no idea. And nobody else does either.
Investing should be done not on speculation, but on sound, thorough, and well thought through analysis. And they should be made with specific objectives that align with your life goals. For the everyday investor, if you’re making decisions purely in the pursuit of money, you’re going to lose. It’s as simple as that.
We’ve gathered a few other highlights from our investor forum, which you can watch by clicking here.