Each year brings its own set of wins, challenges and lessons to learn, and 2021 was certainly no exception.
It’s been an extraordinary year, hasn’t it? Especially for our property markets, where home values grew by more than 25 per cent in most locations.
Property values have not grown at that rate since 1950, when real estate grew 110 per cent after price and rent controls – introduced during WWII – were removed.
So, as we come to the end of the year, I’d like to reflect on the lessons I want to carry with me into 2022.
Here is part 1 of my top 21:
1. Expect the unexpected
Every year, an unexpected X factor comes out of the blue to undo the best-laid plans – sometimes on the upside (like the unexpected election result* in mid-2019) and sometimes on the downside (like COVID-19 in 2020 and the Delta strain in 2021).
Strategic investors try to protect themselves from these surprises by owning the best assets they can, having financial buffers in place to ride through the ups and downs of the property cycle, setting up the right ownership structures, insuring themselves and obtaining holistic advice from their consultants.
But the biggest risk is what no one sees coming, because if no one sees it coming, no one is prepared for it. And if no one is prepared for it, its damage will be amplified when it arrives.
While an X factor seems to come every year, a major ‘black swan’ event – as some call it – one that “breaks the world”, tends to come every decade.
2. Focus on the long term
The strong performance of our property markets reminded us to ignore the numerous pessimistic property predictions by the so-called “experts” – don’t make 30-year investment decisions based on the last 30 minutes of news.
Strategic investors have a long-term focus and don’t change their plans based on what’s happening “now”.
In fact, they don’t buy investments that are working “now” – they invest in the type of assets that have always worked.
In other words, they don’t chase the next shiny toy or the next hotspot.
3. It’s the media’s job to entertain you; not educate you
Remember, it’s the commercial media’s job to get eyeballs on advertisers’ content, rather than to educate you.
However, when the pandemic first hit, many of us watched the 6:00pm news, and then the 7:00pm news to see if there was something different reported and then maybe the ABC’s 7:30, to get another angle on what was going happen to our health, our economy and our property markets.
At the same time, my inbox kept dinging with alarmist messages that were uninformed or unbalanced.
Think about it… how many of those expert’s forecasts came true?
But look how many people worried and stressed about the potential outcomes that just didn’t occur.
And unfortunately, being overwhelmed with misinformation led many people to live in a state of fear and anxiety and caused some to make disastrous investment errors.
4. Take economic forecasts with a grain of salt
Remember all those forecasts that unemployment would reach 10 per cent to 12 per cent?
What about those forecasts of property values dropping 20 per cent or more?
Or those fiscal cliffs we were going to fall off?
They didn’t come to fruition, did they?
Similarly, if you’re reading something frightening in the business section, or hearing it on TV, or learning about it from your neighbour, it’s almost certainly too late to act, because the information is already reflected in the market – in either the share price or property prices.
5. Don’t believe the doomsayers
There will always be someone out there telling you not to invest in property.
In early 2020, at the beginning of the pandemic, the doomsayers found their moment and told us how our property markets would crash. They were wrong of course.
Now they’re out once again telling us that inflation, rising interest rates and mortgage defaults are going to cause the property market to crash.
Don’t listen to these negative Nellies who keep telling anyone who’ll listen to them the real estate Armageddon is ahead of us.
There’s nothing new about these doomsayers who have been peddling their forecasts for a decade or two.
There will always be somebody wanting to stall the aspirations of their fellow Australians who are looking to take their financial futures into their own hands and do something about it.
Don’t let them stop you from achieving your financial dreams. The doomsayers are always wrong, at least in the long term.
6. No one really knows what’s going to happen to the property markets
Be careful whose forecasts you listen to.
There are 25 million property experts in Australia. Everyone seems to have an opinion about the property.
But you know what they say about opinions? They’re like belly buttons: everyone has one but they’re basically useless.
So be careful who you listen to.
Of course, last year, even respected economists got their predictions wrong when they predicted significant drops in our property market.
And even earlier this year, most of the economists did not foresee how strong our property markets would grow.
So, as a real estate investor, while it’s important to have mentors, make sure you’re listening to somebody who has not only built their own substantial property portfolio, but someone who has kept their wealth through a number of cycles.
There are just too many enthusiastic amateurs out there offering investment advice at present.
7. There is no such thing as the ‘Australian property market’
There are multiple markets in Australia, and each state is at a particular stage of its own property cycle, and within each state there are multiple submarkets – depending on price point, geography and type of property.
This means that despite all Australians enjoying the same low-interest-rate environment, the same tax system and the same government, some property markets outperformed others significantly in 2021.
But there’s nothing new about this. Local factors have always driven property-market performance.
So, avoid paying attention to commentary that gives broad generalisations about the Australian property market or even the Melbourne, Sydney or Brisbane property markets.
8. Don’t try to time the market
Even though they are armed with all the research available in today’s information age, economists never seem to agree where our property markets are heading and usually get their forecasts wrong.
That’s because market movements are far from an exact science.
It’s more than just fundamentals (which are relatively easy to quantify) that move markets.
One overriding factor the experts have difficulty quantifying is consumer and investor sentiment.
So, rather than timing your investment purchases (or sales), if you buy the right investment-grade assets, time in the market is much more important than timing the market.
And if you think about it, the top and the bottom of the market are really only one or two days or weeks or months in the cycle.
9. The crowd is usually wrong
‘Crowd psychology’ influences people’s investment decisions, often to their detriment.
Investors tend to be most optimistic near the peak of the cycle, at a time when they should be the most cautious and they’re the most pessimistic when all the doom and gloom is in the media near the bottom of the cycle, when there is the least downside.
Market sentiment is a key driver of property cycles and one of the reasons our markets overreact, overshooting the mark during booms and getting too depressed during slumps.
Remember that each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.
10. Property investment is a game of finance with some houses thrown in the middle
While low-interest rates and easy access to loans drove our property markets over much of 2021, the rules of the game are changing, with APRA once again interfering to slow things down.
Moving forward, it is likely APRA will bring in further macroprudential controls.
This means now is a great time to speak with an investment-savvy mortgage broker to ensure you have the right finance in place for your existing property loans.
Maybe you should consider locking in a portion of your interest rates at today’s low rates.
I’m not suggesting you try to time the interest-rate cycle, but I always lock in a portion of my loans on fixed interest rates to secure my cash flow.
Well, that’s the first 10 of the 21 lessons from 2021 I’d like to share.
Watch out for my next column, when I’ll share 11 more.