October 15, 2020 by Dymphna

Why investors should be scared

Proof that you can lose money in every market

One if five investors are going to lose money in every market.

That’s sort of how I see it.

The latest Pain and Gain report from CoreLogic backs this idea up. Basically, they track recent property sales, compare them to the most recent purchase price, and then see if the owner made or lost money.

The results are actually a bit surprising, and should serve as a warning to all investors.

So on the latest data, they reckon 18% of investors sold their properties for a loss – that’s just shy of one in five.

Conditions were tough in Melbourne and Sydney – where the bulk of sales took place. But they were positively brutal in Brisbane (29%), Perth (50%) and Darwin (67%)!

Yikes. Scary numbers.

Now it’s worth remembering that capital gain is not the only way you make money in property. If the rental returns were good (net positive at least!) then it might be worth taking a small loss on your eventual sales price.

But I kind of doubt that’s happening here.

Because if a property was putting good money in your pocket, why would you sell it?

That means that there’s a bit of a compositional bias in these stats. The investors who are selling are probably also taking a hit on the rental returns.

And I know there are a lot of negatively geared property investors out there. Negative gearing has achieved cult-status in Australia. I know. I’ve had to pick up the pieces more than once.

So what we’ve got is one in five investors losing money on the sales price and most likely losing money on the rental return.

One in five!

Now you might think this reflects the tough conditions Covid has created, but I doubt that too.

First, mortgage deferrals have kept forced sales out of the market for now, so that’s not what’s driving these loses.

Second, the market now looks like it’s going to lose barely 5% in this consolidation phase – that’s practically nothing, and definitely not enough to burn one in five investors.

No, the real culprit here is education.

I think what you’re looking at is investors who don’t know when and where to buy. There’s actually quite a lot to this. I have a tool called Grid Variance Analysis that pulls all these factors together, but the short story is, buying well isn’t easy.

Its very easy to buy into a market that’s not going to perform, or simply overpaying when you buy.

I think we’re also looking at investors who don’t have a range of strategies they can draw on. I spend hours with my students helping them understand all the different ways you can make money in property.

But your average punter is still stuck in the paradigm of buying, holding, and praying that the market goes up.

The difference between successful and unsuccessful investors – between pain and gain – is applied education.

So let this be a warning to you.

I’ve been saying for a while that there’s an epic boom in the offing. It’s coming soon.

But if you don’t know how to play it, there’s a one in five chance (at least!) that you’re going to get burned.