July 30, 2020 by Dymphna

Why you’re thinking about property wrong

Even experts make this mistake about property.

There’s a sense that sentiment in the market might be shifting right now.

With the situation looking a bit grim in Victoria and NSW on a knife’s edge, hopes are fading that we’ll “have the boys home by Christmas.”

This is going to be a long war.

As we get our heads around that reality, we’re taking another look at our financial markets and where things are heading.

Louis Christopher at SQM Research sums up the mood when it comes to property:

“We are now recording falling dwelling prices as we speak… It’s Sydney and Melbourne that are the primary concerns. What’s triggering this housing downturn in Sydney and Melbourne, it’s not just the downturn in the economy but the specific closure of the international border, which has meant that the normal migration numbers that we have come through into Australia, we just aren’t getting at the moment. And those migrants generally come to Sydney and Melbourne first…

… Property investment has already been in decline… If you were a property investor at the moment, what are you actually looking at? You are looking at falling housing prices, falling rents. Not really a great time to go and buy a property if you are a property investor… I think property investors are going to stay on the sidelines for some time to come.

Let’s go back to the last downturn in 2018. That was, of course, driven by restrictions in bank lending. Housing markets in Sydney and Melbourne peak-to-trough fell 15% in that particular event. Well, the event we are facing right now is a lot bigger than that. So we’re thinking that potentially we could see falls in Sydney and Melbourne of up to 30% peak-to-trough.”

30% peak-to-trough? Are you kidding me? If prices fall 30% I’m buying everything.

But what I wanted to pick up on here is the arithmetic facing property investors, and why it’s wrong.

Way wrong.

Christopher is making the classic mistake – the mainstream mistake – in what property investing is actually all about.

I call it ‘The Share Market Fallacy’.

Basically, this is the idea the only way to make money as a property investor is to buy whatever you can and whatever price the market gives you, and then just hope that the market goes up and you make some money.

This is one of the ways that you can make money with property, but it’s pretty much the worse way to do it.

There are dozens of other strategies I have in my tool kit – subdivisions, renovations, rebuilds, townhouses, rooming houses… or any combination of all of the above.

And you don’t have to just take what the market gives you either. You can negotiate on the price. You can go for an extended settlement. You can put the property under option. You can spruce the place up so you get more when you sell.

The point is, as property investor, you have lots of ways to make money if you know what you’re doing. Simply relying on the market to make money for you is what amateur investors do.

And as I said, I think this idea actually comes out of the stock market. Because in the stock market, this is what you have to do. You can’t negotiate with individual sellers for a better price. You can’t subdivide your share or renovate it. You can’t do anything.

You just take what the market gives you.

But for me, this is the fundamental difference between the property market and the share market.

And it’s why it’s always a good time to buy a property, if you know what you’re buying and what you’re strategy is.

And I tell you one thing, I’d rather buy into a downturn when people are fearful, than chase prices higher during a boom. 100%.

So look out for the Share Market Fallacy.

Now that I’ve pointed it out to you, you’ll probably see it everywhere.