Looking through a microscope leads to property myopia

Looking through a microscope leads to property myopia
Looking through a microscope leads to property myopia

Remember this picture? It might look like a museum image of pre-historic man, but it’s a rock located in the Cydonia region of Mars.

JPL scientists made the discovery of the “Face on Mars” in July of 1976 while searching for a suitable landing site for Viking 2 Lander. Wanting to give the public a familiar looking feature, they released this image to the tremendous delight of daily tabloids that ran with headlines suggesting ancient intelligent life had been found on Mars.  Of course it all ran amok a few years later when on closer inspection the imagined eyes, nose, and lips turned out to be nothing more than peaks and ridges. The search for extra-terrestrial life continues. 

It’s an example of what can happen when you look too closely at a composition and consequently miss the underlying truth. This year I’ve spoken with many anxiety-ridden investors wanting to know why the clearance rates are dropping and if their property is about to become a victim of the market snapping under the strain. Most based their concerns on reports in the media ranging from Harry Dent’s guest spots on Sunrise to sensationalist headlines run in major newspapers that suggested houses were losing thousands daily (for example). 

The questions don’t surprise me – newspapers have to sell, and property editors need to find a new angle to explore each week. Therefore out comes the microscope and a blown-up picture is used as conclusive evidence for a brand-new theory of property evolution – one which shows property is on a long-term downward curve, usually based on short-term data and speculation (despite the weight of evidence countering otherwise).

However, no one is suggesting the view is always sunny.  Seasoned investors who have experienced and prospered through property cycles, lived through similar predictions of dramatic crashes in the 1970s, ‘80s and early 2000s, and they know how to keep the picture in perspective.  However we’re not out the doldrums yet.  Many expected the 0.25% interest rate drop to produce a change in sentiment; however a drop in rates indicates the RBA is cautioning us about the continuing fragile state of our economy, and therefore it’s no surprise cautionary sentiment still rules. 

Investors aren’t like home buyers – they can step in and out of the market as their “gut feeling” dictates. However, the mistake many make is waiting for the microscope to show a positive outlook before choosing to climb on board.   Once they can see their desired asset class rising in value, they’re happy to take the initial step. However we’ve all witnessed the unsustainable booms which suddenly escalate once they start to gain momentum. Why wait for another to occur?  It’s not wise buying – which is essentially where investors make their dollars. 

It may be a buyer’s market – it’s certainly being spruiked as such – however it’s only a buyer’s market if buyers are prepared to stop being spectators and take advantage of current flat conditions.  The fact that many are still sitting on the sidelines can only indicate there’s speculation prices may fall further.

However it’s not the likely reality - there are two parties in the purchase of real estate, and while some buyers may be willing to sit back and wait for more price falls, there’s no indication vendors are prepared to drop their expectation any further. Many aren’t in a position where they need to – hence why many homes linger on the market or get withdrawn to wait for better times ahead. 

Caution is a valuable emotion; however it can be better employed at the buying side of the equation if it’s used to build strong buffers to weather against market movements – history bears witness they’ll be more to come.   Protective measures include not over leveraging, investing within your means and understanding “long term” means more than a couple of years.

The property market in Australia isn’t immune from bubbles – invest in the wrong type of home or at the wrong time, and you could well find yourself sitting on top of one – I’m thinking in particular of mining towns, new estates, and the high-rise culture dominating inner-city CBDs.

However if you don’t see the bigger picture it’s too easy to make sweeping statements and lump everything under one umbrella. It’s a dangerous concept to promote because however strongly Australia has faired over the GFC the memories remain and people are susceptible to media suggestion.  What’s more, we can see GFC aftershocks continuing to affect Europe, and there are also those who suggest China will fall at some point and therefore we shouldn’t assume our strong economic position is set in stone. So investors have a right to be understandably concerned where they place their income, and confidence plays an important role in the choices they make. 

However like it or not, the well-worn argument that population growth underpins the market is based on fact, not speculation – and providing you invest where the expanding population wants to reside, you can be pretty sure you’re holding onto an asset that will grow over the long term.

Furthermore, out of all our states, Victoria is set to take the lion’s share of this population growth – everyone’s read the reports of how Melbourne’s on track to outgrow Sydney.  Melbourne has one of the strongest economies in the developed world.  Four of Australia’s top five most profitable public companies are headquartered in Melbourne, and the demand for Melbourne’s lifestyle and lack of inner- and middle-ring suburban dwellings to absorb the need is clearly evident in all the long-term graphs you can source.

In particular, if you choose to invest in areas that follow the train lines and if possible, also the bay, it’s hard to envisage supply ever fulfilling demand.  Town planners would do better investigating the price of extending existing train services into new outer-metropolitan areas to ease inner-suburban inflation rather than forever building in far-off lands that have little more than a daily bus service and do little to attract future growth. 

Melbourne’s real estate, for example, has historically never gone down over a 10-year period, so any arguments put on the table to suggest it’s about to happen and “the bubble burst” need to be backed up with more than a blown-up microscopic view similar to our man on Mars – I’d rather base my theories on historical data while keeping a cautionary eye on future events than run for the hills in panic of what are merely predictions of extreme market falls.   Short of a natural disaster of magnificent proportions, or a new law restricting the amount of children each family is allowed to have, the long-term cyclical upward trend in our markets is not likely to change any time soon. 

The demand for houses – particularly close to the city – is vastly beyond the supply most of our capitals are currently able to offer.  And while variables in the economy (such as interest rate rises) have an effect on certain areas of the market – for example the first-home buyer sector - the need for well-located accommodation will be largely resilient against economic factors – over the long term.

To speculate on future trends is unwise considering the problems facing Europe, however providing our economy continues to perform well and unemployment doesn’t rise disproportionably (of which there’s no indication) – and taking into account the RBA has also left the door open for a further drop in rates over the coming months – historical data (which is the best thing we can base speculation on) tells us that at some point house prices must start to rise again. It’s not a green light that we’re heading into a boom; it’s the looming reality of living in country that has a shortage of quality real estate in the areas in which people want and need to live. 

We have no control what so ever over the short-term influences that affect our market cycle, however short-term forecasts only affect those who buy today and sell tomorrow – and whether it be stocks or real estate, such high-risk investment is always a volatile option.

So don’t be fooled – you can spend your life looking through microscopes, reading long market reports and predictions based on speculation, but if you choose to look at the bigger picture and withdraw yourself from the heard, you stand a much better chance of making the right choices for your life, rather than worrying about everyone else’s. 

Catherine Cashmore is senior buyer advocate for Elite Buyer Advocates. With extensive experience in all matters regarding real estate, Elite Buyer Advocates purchases and negotiates more than $100 million worth of property each year for its clients. 

 

 

 


Catherine Cashmore

Catherine Cashmore

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

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