Australia Doesn’t Have a Property Bubble. Here’s Why.

Australian Property Bubble

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.

What the Rise of the Melbourne Footy Club and the Successful Investor Have in Common

Paul Roos

It’s 2013, the Melbourne Demons have won just two games with a scoring percentage of 54.1 (which means their opponents would score twice as many points in a game of footy as they did). Sitting second last, only above Greater Western Sydney, it was statistically Melbourne’s fifth worse season in VFL/AFL history.

Contrast this to the stock market. It’s 2009, the stock market has lost 55% of its value, statistically, it was the second worst crisis in the last 100 years (behind the great crash of 1929).

Investors were pulling money out of the stock market at record pace, and hindsight would tell us it was precisely at the wrong time.

Meanwhile, at the Dees, memberships were dropping off like flies. Members we’re cancelling their memberships at record pace, precisely at the wrong time, with membership levels at the lowest point in recent years.

Demons Members

Source: Wikipedia

We recently held an exclusive investor forum at Parliament House featuring AFL champion and premiership coach, Paul Roos. Here are the two most important factors that helped build the recent success of the Melbourne Demons footy club, which I believe are uncannily similar to that of successful investors.

1. Having a game plan (and sticking to it)

The Demons had hit rock bottom in 2013, when Paul Roos was coaxed into helping build a better future for the club.

When joining Melbourne, Paul Roos said, “I say to a lot of people ‘I know we are going to be successful’. I just can’t give you a date.”

Roos implemented a structure, a process, he implemented a game plan. A game plan that required trust, patience, and above all, discipline. This was the most challenging aspect of the plan according to Roos – sticking to the process.

Roos says, “we need to know whether we can get from where we are today to where we want to be.” The concept of having a game plan is no different when it comes to investing. Investors need to know exactly where they are today, and where they want to be in the future. Once you know where you want to be, you can reverse engineer a strategy. Unless you know where you’re going, trying to design and construct a plan is going to become an extremely difficult task.

Without knowing the goals for the next three years, Paul Roos would not have been able to chart the course, or carry out the plan. “My message to them is to trust each other and stick to our game plan. That way, we maximise the chance of getting a good result.”

2. Focus on what you can control

Roos says, “If the scoreboard had been taken down at the MCG and at Etihad, we would have won more games”. He would tell his players, “Don’t worry about the scoreboard, the scoreboard will look after itself” Roos said.

Roos emphasises, “you cannot control the outcome – what you can control is the process, what you can control is the strategy.”

Like the Melbourne footy club and the scoreboard, investors cannot control whether the stock market goes up or down. Investors can however, focus on the factors that puts the odds of success in their favour.

First, it starts with understanding what drives success. On the football field, it’s identifying the factors that you can control that put the odds of victory in your favour – these could be number of clearances, tackles, fumbles, etc. In the investment world, it’s identifying what drives returns and building portfolios with higher expected returns across asset classes.

Secondly, investors can control the diversification of their portfolios. That is, to not rely on one investment to kick the winning goal – because it’s a team effort.

Finally, and most importantly, investors can control their behaviour in response to the scoreboard (the market). How the Demons responded to the scoreboard, and how investors respond to the ups and downs of the stock market, determined whether they won or lost.

Today, the stock-market has well and truly recovered. Those who had a game plan and stuck to it, have increased their odds winning. Others, who may have thrown out the game plan at ¾ time because they were down by 30 points, probably lost the game by 90 points.

Today, Demons are sitting 7th on the AFL ladder with a percentage of 106.1, and likely to be playing finals footy. Paul Roos joined the Melbourne footy club to help build a better club for the future. He designed a structure, a strategy and a game plan. “What happens this weekend, we’ve planned and prepared for in November,” he says. Although the road to success may be bumpy – the unexpected may occur, or conditions change, there’s a plan and process to follow.

Although not directly Melbourne Demons related, Paul Roos summed it up best when discussing the Sydney Swans 2005 grand final win, “the night before the grand final, I promised the team that they would win. And I only said that because I knew we had the strategy, I knew we had the personnel, and I knew if we implemented the plan the whole time, we would win the game.”

What’s your game plan?