Watch out for the “BUST”!

This is a long post, but I’m getting a little tired of so-called ‘experts’ predicting the next property bust. There seems to be a swathe of media attention about a real estate bubble bursting soon (it seems to be the only thing the property sections of all the major newspapers write about nowadays). As smart investors, let’s keep some perspective about the whole thing – let the herd get worried about the so-called ‘bust-we-have-to-have’. Maybe if we, as smart investors, stop worrying about it, everyone else we follow suit soon.

Common sense says the capital growth rates we saw in 2002 won’t last forever, but does that mean that real estate is going to ‘bust’? Property is straight economics (like most things in a free market), and, in general terms, as long as demand exceeds supply, prices will rise. So, if the ‘median’ house price in Australia only rises 3% in 2004 – do we sell all our properties and throw the money into cash accounts? Of course not. Even Sydney in 2002, with ‘median’ capital growth rates of 20%, some areas and suburbs actually decreased in value – hard to believe, but true (take houses in Beaconsfield and units in Lilyfield as two examples).

Even in a down market, there are plenty of deals to be created. Just because the Australian median house price only rises 3% doesn’t mean you can’t find a property that acheives 7%, 10% or even higher capital growth in a year. It will be harder, sure – but not impossible! And what are we investing for – short term capital gain, or good long term investment potential? As always, do your homework and you will win in the end.

Examining past trends can be interesting, but only if current conditions are taken into account. For example, a few people I know are starting to study what happened after the last property ‘boom’ in the 80’s to try and predict the future. However, doing that is not comparing apples to apples. Our last property boom was fuelled by high inflation – something we don’t have at the moment; the $AUD was in the mid to high 90’s against the greenback, and you could earn 13% on your cash investments (mortgage interest rates were also at about the same level). There’s also been a whole bunch of changes in the general economic environment since our last boom: taxation bracket creep, the GST, stamp duty bracket creep, the introduction of compulsory superannuation, and so on and so on. Australia was a very different place economically during our last property boom.

So rather than examining what happened during the last property boom, let’s try and think about why it happened – this will hold a lot more answers for us than just looking at trends and graphs.

And we’re all in this for the long term right? If we’re taking a long term approach, let’s not forget that buying at the top of today’s market, means we are buying at the bottom of tomorrow’s market… as always, so long as you are investing with your head and not your emotions. As smart investors we don’t care what happens next year, we care about what happens in 5, or 10 or 25 years. As they say, the best way to make a small fortune quickly is to start with a large fortune. Make your fortune slowly.

Saying that the property market is about to bust “just because it feels like it has to” isn’t good enough anymore. We need to start looking for good economic indicators that point to a downturn. I won’t go on any longer except to say, that in general it seems property is as good an investment today as it’s ever been.