Investors ignore the signs

Even though the property market does move in cycles, so many people choose to ignore the signs and the lessons we can learn from observing what has happened.  Michael Yardney shares some of his ‘quieter moment’ lessons with us.  Things he has learned from his experience of many years of successful investing.
Kevin:  One of the things we have learned is that the market moves in different cycles – not only cycles in time but even cycles around the country. Different markets move at different paces. You look at the Sydney market, and boy, hasn’t that boomed? You shouldn’t get disenchanted thinking that you might have missed it.
I’m going to ask that question of Michael Yardney, because I know you’re a sophisticated investor, Michael.
Michael:  That’s a nice word. Thank you, Kevin.
Kevin:  I can say it; probably, you can’t. But you’ve been investing for quite a long time now. What are the lessons you’ve learned from sitting back and looking at these cycles?
Michael:  There have been lots of lessons, because when I first started investing, I didn’t even understand the concept of property cycles. I just bought and I bought close to where I lived or bought close to where I went to school. I was lucky. What happened was the Gough Whitlam government came in. We had massive inflation. Property values doubled in five years, not just mine; I just happened to be at the right place at the right time.
Kevin, one of the worst things that can happen to a beginning investor is to get it right the first time because you think you’re smarter than you are.
Kevin:  There’s a great lesson in that, too. The other thing I think we’ve seen, too, is that while booms don’t last forever, neither do busts.
Michael:  Sure, they don’t. Interestingly, one of the lessons I learned along the way is that property markets act irrationally. When I started to learn about cycles, I started to study them and I started to look at the four phases of the cycle and what’s going on.
I guess the lesson I’ve learned in the last years as we’ve dug deeper and researched more is property markets aren’t only driven by fundamentals; they’re often driven by the irrational and erratic behavior of an unstable crowd of other investors.
The lesson is never get carried away too much by those booms that you mentioned, Kevin, and never get too disenchanted by the property slump.
Can I give you an example of what’s currently happening?
Kevin:  Yes, please do.
Michael:  Sydney was the hottest property market in Australia for a number of years, and at the end of last year, APRA came in, restricted some lending criteria, talked about a bubble that’s going to burst, created concern. The media created concern. People in New South Wales started to second-guess themselves and question, “Is it too late?”
So the Sydney market stalled at the end of last year and has dropped back a little bit this year not because of the lack of fundamentals – because Sydney is creating more jobs, has huge population growth, and does not have the oversupply that Melbourne and Brisbane have. It’s not the fundamentals that have held back the market; it’s consumer crowd confidence that has slowed it – and it’s starting to pick up again.
The lesson is booms don’t last forever. Be prepared, don’t be surprised and don’t overreact when the market changes phase.
Kevin:  In the same way, I guess you have to be very aware and beware of doomsayers.
Michael:  There’s a conga line of doomsayers who come from overseas each year and tell us that we’re going to have a market crash. The latest one was Jonathan Templar who predicted property values are going to drop because of what happened in Moranbah.
Last year, I remember you interviewed Harry Dent, and he predicted then that by the middle of last year, property values were going to fall because of what was happening in China. There is one after the other. It goes way to back to Steven Keen who had to walk from Canberra to Kosciuszko with a t-shirt saying, “Ask me how wrong I was about property prices.”
Often, they have an agenda of selling a book or selling courses. But these are powerful emotions and one the media uses to grab our attention. I think, sadly, some people miss out on the opportunity to develop their own financial independence because they listen to those messages. They listen to the messages of people who want to deflate the financial dreams of their fellow Australians.
Kevin:  And there are a number of them around. You mentioned earlier one thing that you’ve done. Probably you did it purely by accident at the start. That is you developed a system. How important is that, especially in the cycles?
Michael:  Kevin, I didn’t have a system to start with. I bought emotionally like everybody else, and it took me a while to do it. But I think sophisticated investors do follow a system because what it does it take the emotion out of decisions. It also ensures they don’t speculate. Look, it may be boring, but it makes it profitable.
To be honest, almost anyone can make money during a property boom because the market covers up the mistakes. But many investors without a system are going to find themselves in financial trouble when the market turns, as it did in the regional towns or mining towns. I remember Warren Buffet’s great saying, “You only find out who is swimming naked when the tide goes out.”
Again, I think you have to have the right system for the right area for the right sort of property. You have to understand what the end game is. If you do have a system, then you’re more likely to have consistent profits, you’re more likely to reduce your risks, and you’re more likely to have an exciting life.
Kevin:  You said, a few moments ago, that in a property boom, anyone can get rich. How important is it to be aware that you don’t go chasing those fast-money-type schemes?
Michael:  That’s a good question because most of us want to get rich. Only this morning, I got an e-mail from Kelly who I actually suggested she doesn’t buy just yet – she waits until she builds up a little bit income, more savings, and more serviceability.
She thanked me for it because she said, “I keep reading the front of those property magazines and I read about people who got 20 or 24 properties, they bought 10 properties in 10 years,” and she feels she has missed out. I think we’ve also heard the downside to a lot of those stories when they’ve actually bought the wrong properties.
To me, it’s not how many properties you have; you really have to own the correct assets and try not get influenced, to get swayed, by the latest “get rich quick” artist with a great story about how you can join them and become stupendously wealthy overnight.
I know their stories are compelling, I can understand they can be hard to resist, but I think they pander to those people who want to give up their day jobs and get involved in property full-time, suddenly become a developer, suddenly flip properties, renovate full-time. Patience is an investment virtue, Kevin.
Kevin:  Therein lies the problem, too, because for a lot of people, they do go chasing those “get rich quick” schemes and they get anxious about missing the cycle and so on instead of looking at it as a business. This is the business of property.
Michael:  It is. You’re in the business of property. During the last boom, many investors forgot that age-old adage of the fundamentals of buying the best property they can afford in proven locations. They went for glamorous things, and now they’re the casualties of that.
Kevin:  Earlier in the show, too, I was talking to someone about the importance of having a buffer. It’s very important if you’re looking at this as a business, too, that you need to set it up to make sure you can move through these cycles.
Michael:  It gets back to what we were saying a bit earlier that the boom-and-bust cycle will continue to occur. Every year, there will be unknown X factors coming out of the blue to make your best-laid plans look a bit shaky. That’s the importance of having financial buffers to see you through, to help you ride the property cycle. That means the roller coaster ride won’t be as dramatic.
Kevin:  Bottom line for us, Michael?
Michael:  Cycles are inevitable in any investment market, and our property markets, they’re behaving normally. They’re working their way through the cycles. Kevin, I think with lower inflation and lower interest rates, the cycles won’t be as dramatic moving forward – so we won’t have as high highs or as low lows – but that doesn’t mean there aren’t opportunities out there for property investors.
I think the message is well-located properties in the capital cities are going to do well, but remember, of course, each state is at its own stage of the property cycle, so you don’t really have to try and pick the cycle; just stick to a strategy and when your finances are ready, when you are able to do it, get to the next property, don’t try to be too smart.
Kevin:  The bottom line: be selective and think long-term. My guest has been Michael Yardney from Metropole Property Strategists.
Michael, thanks again for your time.
Michael:  My pleasure, Kevin.

One thought on “Investors ignore the signs

  1. Great article Kevin. I loved Michaels answers straight to the point and matter of fact I was recently at Moranbah. Bit quiet out there at the moment. My take away value from the article is get a system and stick to fundamentals. Like Michael said ” buy the best property we can afford in proven locations”. Is sound advice in any market.
    Thank you

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