Over the weekend, serial entrepreneur and celebrity Mark Bouris penned an investment advice piece in the Daily Telelgraph extolling the virtues of property as a long term investment. It’s not worth wasting too much time on this but the thrust of his piece is worth looking at because it makes one big mistake that you should be wary of in every investment class just now, it relies upon historical performance to make a case:
As the year gets going we can expect different predictions from various commentators about the prospects of the residential property markets.
What is actually happening with residential property?
In the past five years the prices paid for Australian property have looked like a sideways ‘S’ snaking along the graph. According to RP Data-Rismark research released two weeks ago, property peaked in May 2007 when it was growing at 4.0 per cent per year, but by early 2008, property value growth had hit zero and was heading south to -1. and -1.5 per cent, where it stayed in negative territory for a year.
Prices recovered in 2009, and from mid-09 to mid-2010 prices growth was almost back to where it had been in May 07; not quite 4.0 per cent but over 3.5.
So, here we have the first consequence of the fundamental error of relying upon historical performance. The price recovery of 2009 was, of course, based upon unprecedented government intervention in the housing and mortgage markets as well as the economy more broadly. It was a never to be repeated stimulus environment that surely deserves a mention. Bouris goes on:
However, since the end of ’09, Australian property has dipped and in the year to November 2011, prices were negative again.
It hasn’t been a happy or predictable time but I believe 2012 will see a comeback from property.
One reason for this is that the RP Data-Rismark release showed a sign of recovery in residential property during November 2011. Capital city sales posted a gain of 0.1 per cent and regional/non-capital city sales rose by 0.3 per cent.
The gains might be small, but they are the first rises in a year and it’s a good sign that property is heading in the right direction.
Secondly, interest rates were cut twice in two months at the end of 2011, bringing the official cash rate to 4.25 per cent. This means that those 90 per cent of Australian home borrowers who use a variable rate mortgage should be paying between 6.5 and 7.5 per cent for their mortgages.
It’s not cheap, as such, but it’s a comfort zone for most borrowers.
Thirdly, property has a market value where the price is set by buyers and sellers. Currently, buyers are in control, either saving their cash, shying from debt, waiting for a cheaper market or making offers lower than the seller wants.
But these situations are dynamic and when the dust settles from the holidays there could be sufficient people wanting to take advantage of two interest rate cuts, to kick start the auctions.
Kudos for at least mentioning last year’s housing weakness. But other than that there is no analysis here beyond the assertion that lower rates will spur price growth. Presumably because they have done so before. Then Bouris comes to his core case:
Moreover, property is an asset measured in 10-year cycles and there has not been a decade since the end of World War II where property values have not risen. Modest asset growth will return when you measure it decade by decade – we just won’t see the asset inflation we saw in the 2000s.
I’ve always told people who seek my advice that the worst thing you can do is delay buying property, or stay out of it too long. It will rise in value over a decade, even if it doesn’t rise one year from now.
As long as you don’t over pay for property, it’s a safe, steady investment that you can live in and use to provide security for your family.
Again, and explicitly this time, property will rise because it always has. But there is no precision or context. Making money is about real returns not nominal and as the following chart from Who crashed the economy shows, there have been two periods since WWII when real returns for property were negative for well over a decade:
Moreover, the chart dates back to 1890 and shows that following the Melbourne land boom, real returns on property took much, much longer than a decade to offer a return.
The lesson is that historical comparisons (let alone cherry picked ones) do not help make money in times of great change and economic adjustment such as those we face with the great demographic shift, the decline of Western credit and the rise of Eastern production. In fact, historical comparisons may actually be very misleading in such times. What you do need is an analytical framework that judges how the adjustments will affect asset classes that have previously out-performed , as well as providing insight into the assets that will do well in the new settings.
