by Terry Ryder – real estate investor, researcher and writer
Bad leadership has extinguished the fires of recovery
Poor judgement by politicians and bureaucrats has snuffed out the recovery that was building in the Australian economy and property market.
A series of bad calls from the Federal Government, the mediocrity of the Federal Opposition and misjudgement by the Reserve Bank have combined to extinguish the rising confidence that was inspiring the nation’s rebound.
The RBA under Glenn Stevens has got it wrong on interest rates. The RBA has reacted as if Australia had a booming economy. We, in fact, had a fragile recovery under way, but no longer. We’ve been handed too many rate rises too soon.
The Federal Government has contributed with a series of bad judgement calls, including issues mismanagement and policy backflips. The clumsy handling of the RSPT, inspiring a dummy spit from the mining lobby, has dented public sentiment.
Making matters worse has been the bumbling performance of the Opposition under Tony Abbott. Their response to the Federal Budget was laughably bad and Abbott’s admission that you can’t really believe a lot of what he says just adds to the loss of confidence in our national leadership.
Confidence is critical in real estate, but the business and consumer buoyancy that existed at the start of the year has been doused. All of the key players – Julia Gillard, Tony Abbott and Glenn Stevens – need to lift their games. Thanks to them, Australia is no longer the poster boy of global recovery.
National Overview: Short-termism is the curse of the property industry
Property investors are unlikely to succeed unless they understand that what happened with Melbourne auctions last weekend is irrelevant; that the movement in Sydney median prices in May is immaterial; that the Queensland Government’s decision yesterday about stamp duty is of passing interest only.
Put another way, if you let the daily content of tomorrow’s fish-and-chip wrappers influence your investment decisions, you’re in the wrong business. If you delay action until the outcome of the next election or Reserve Bank board meeting, maybe you’re better suited to the sharemarket.
Every day I see evidence that most people fail to understand that real estate investment is a long-term strategy and that short-term events matter not a jot. I see people getting caught up auction hysteria and making decisions in response to newspaper articles written by non-experts. I see people tying themselves in knots trying to figure out the optimum time to enter or exit the market.
This kind of short-termism is the curse of the property industry and it stops people taking action that would make them financially secure. I recently had a series of email exchanges with a Sydney investor who believed that unless I update my reports almost daily they’re worthless because “the market is changing so fast”. In reality, current events in the market are irrelevant to my reports, because they’re designed to provide a snapshot of the future with a long-term focus.
Investors would do better if they stopped getting the daily newspaper and avoided watching the evening news. It sounds like a throw-away line, but I mean it quite seriously. The daily content of media contributes nothing of use to people who want to be serious investors.
Don’t get me wrong: media has its uses. Every day I trawl for information. But I ignore market commentary, any form of shallow analysis and the sound bytes of ego-driven economists. I’m immune to headlines about auctions or short-term median price movements or the scare campaigns of the developer lobby.
I do, however, seek information about market-shifting decisions by governments and businesses. I need to know where the new infrastructure is planned. I’m interested in progress on major industrial developments. I like to know about the expansion plans of universities and hospitals. I want to read about demographic patterns. I’m keen to find out about the economic makeup of cities and towns, because a diverse economy usually means solidity.
These are all things that impact long-term.
But I have little interest in the jottings of journalists obsessed with short-term events. In June we have seen newspapers around the nation placing undue significance on statistics such as last weekend’s auction clearance rates and the rate of price rises in May. Every small piece of information is given importance, with conclusions that are often nonsensical because the writer is not a property analyst.
Research organisations hungry for publicity feed this tendency of media towards shallowness, knowing journalists are happy to regurgitate press release material so long as there’s a sensational headline in it. Never let the facts interfere.
A June article in The Age devoted large amounts of space to scrutinising statistics that depicted market movements across one month. The article described the “the large-scale withdrawal of first home buyers as the government cut back on the boosted grant scheme” as extremely significant, even though first-home buyer activity peaked 12 months earlier, long before the Boost was phased out. It considered auction clearance rates to be pivotal, even though they describe activity in only a narrow portion of market. Clearance rates say nothing about the middle and outer ring suburbs where the bulk of a city’s sales occur, and mostly via private treaty.
The Age article claimed “the abruptness of the change in market conditions has caught some off-guard, particularly agents and vendors”. Clearly the writer has never looked at the price graphs for the inner-city suburbs of Melbourne which show that a pattern of price spikes followed by sharp decline is the norm in these volatile markets. Anyone “caught off-guard” by events in these markets is clearly not a student of history.
That kind of article is seen daily in major newspapers around the country. Many writers on real estate issues have little knowledge of the subject and compound that problem by seeking analysis from non-experts or by placing their own personal spin on events.
It results in a stream of misinformation, the like of which I have not seen in my 30 years as a specialist real estate writer and researcher. It has led to the following myths being accepted by the public as fact …
•There is a “chronic housing shortage crisis”.
•Affordability is at an all-time low.
•The prime inner-city suburbs provide the best capital growth.
•There is a housing price “bubble”.
The best way for investors to deal with this flood of misinformation is to understand that none of it matters in the overall scheme of things. Property investment requires long-term strategies.
US billionaire Warren Buffett buys investments that will serve him well even if they close the market tomorrow and don’t reopen it for five years. He pays no heed to short-term events.
I have many times quoted the 2008 words of Grant King, managing director of Origin Energy which was embarking on a $9.5 billion coal seam gas deal with US energy giant Conoco Phillips amid the GFC carnage. Making that commitment at such a time has astounded those who believed the world was about to end. But King said: “We make investment decisions in assets that have economic lives of 30 years or more. And so cycles that play out over a year or two are basically irrelevant. We’re fundamentally driven by the long-term view.”
That attitude applies equally to real estate. If you don’t think like that, find something different to do with your money.
Feature topic: You won’t achieve your investment goals if you just follow the crowd
You can recognise average Australian real estate consumers by their defining characteristic: they will be doing the opposite of what makes sense.
They will sell when they should be buying and they will buy at the peak of a boom.
Australian property consumers are pack animals. They like to be part of the herd. They don’t really mind if the herd is stampeding towards a cliff-edge. They’d rather die painfully than act individually.
The auction frenzy that consumed Melbourne in the early part of 2010 is a standout example of the herd mentality that drives real estate behaviour. The ritzy suburbs of Melbourne’s inner south-east periodically go ballistic. Buyers who get caught up in the euphoria pay far too much for prestige homes and regret it later. Being pack animals, they charge in because that’s what the herd is doing.
Following the herd removes the need to think or plan. There is security in numbers and the safety of knowing that it must be the right path if so many are following it.
By the middle of June, there were signals that the frenzy was evaporating. That was when sellers decided to do the opposite of what makes sense: they started clamouring to put their properties on the market. Just as sales levels were waning, sellers were listing their homes in record numbers.
None of this makes any sense. The properties that buyers were so desperate to secure in March, April and May, sat there attracting no interest throughout 2009. Anyone with the strength and wisdom to move against the herd would have been buying then, securing homes at much lower prices.
Instead, most buyers have paid premium prices at the peak of an unsustainable boom. Within 6-12 months many of those properties will be worth less. We know this from history, with the prestige suburbs of Melbourne and Sydney having a long-term pattern of short-term volatility, with price spikes often followed by sharp decline. We can also be confident it will happen again, because of the growing number of indicators that the prestige market is declining.
The people who succeed with any kind of investment run against the herd. The common feature to the stories of people who have become wealthy is that they either led the pack or ran in the opposite direction. “Buy when everyone’s selling and sell when everyone’s buying” is the simple formula.
There were many great opportunities to buy well in 2009. Investors were largely absent from the market, awaiting that mythical bell that rings when it’s the right time to get into property. They missed the best opportunities by waiting for the herd to move.
Melbourne and Victoria: The top has gone over the top
Victoria is undoubtedly one of the strongest economies in Australia. It has led the nation in jobs creation recently, leaving New South Wales well to the rear. Every major economic indicator has Victoria towards the top of the national rankings and it continues to deliver above-average population growth
It’s a shame the reaction of the property market has been to go troppo. Or, at least, the top end of the market has gone over the top. The problem with Melbourne is that, unlike everywhere else in Australia, it apparently thinks auctions are a good idea.
When you get a combination of a bullish economy, a dodgy selling system, dishonest promotion through the widespread use of under-quoting in auction ads (enticing people to attend auctions with the false hope of getting the property within the advertised price range) and a rabid media whipping up hysteria about it all, the end result is likely to be nonsense.
For a long time I’ve thought Melbourne was under-rated and under-valued. In the previous edition of this report I wrote: “Melbourne has finally, belatedly, produced the growth spike that I have been expecting. In the latter part of last year and into the early months of 2010, the Melbourne market has surged. All the major sources of research data on prices rates Melbourne the No.1 growth city among the state and territory capitals.”
Three months on and Melbourne has done more than play catch-up. The millionaire suburbs have gone beyond sanity, as they periodically do.
Fortunately, the mainstream market has behaved more sensibly. The cheaper suburbs have avoided the frenzy in the inner-city areas and have continued doing what they always do, which is to deliver steady sustainable growth in prices.
This is why the affordable suburbs produce higher capital growth long-term than the so-called “prime” suburbs. The Tooraks and Armadales of the market are volatile, with growth spikes interspersed with periods of falling values.
In humble markets like Dandenong and Frankston, that doesn’t happen. If circumstances force you to sell in these areas, you’re likely to get a better price than you paid, because the market delivers at least some growth every year.
Some research sources claim a 27% rise in Melbourne’s median house price. This is highly misleading (as medians often are) and it does not mean property values have risen to that degree. It has been caused by the uplift in activity at the top end of the market.
Conclusion: Look behind the lies, damned lies and statistics
The most revealing statistics on real estate in recent times came from RP Data. They divided the national market into inner-city suburbs, outer suburbs and regional areas. They revealed that average price growth across Australia over the past 12 months has been 16% in the inner-city, 8% in the outer suburbs and 5% in the regions.
The data is important because it helps to look behind the screaming headlines that have misrepresented the real estate market this year. We’ve been led to believe that the market has gone ballistic everywhere, with massive price growth creating a property “bubble”.
In reality, only small sub-markets in a small number of cities have behaved like that. Normal markets have prevailed in most cities and in most market segments of all cities. The regional areas outside the capital cities, which account for 40% of sales nationwide, have had steady rational markets.
The madness in the top end of the Sydney and Melbourne markets has not occurred in Brisbane, Adelaide, Perth or Canberra.
This serves as a fundamental lesson for property buyers: it pays to look beyond the headline – or to ignore the headline altogether.
Comments or questions are welcome.
Investment Property