Navigating cycles can be tricky by Michael Yardney

One of the interesting things about the property market is that it moves in cycles – not only cycles in time but cycles around the country. This can be tricky for investors to navigate when they are starting out, but with sound fundamentals and strong investment principles, these cycles can be used to our advantage.

We spoke to Michael Yardney of Metropole Property Strategists. Michael has been investing in property since the Whitlam era and has seen it all. He has a lot to say about how to move through a property cycle, as well as common mistakes and traps for inexperienced investors.

Property moves through 4 key phases

Generally speaking, the property market shifts through 4 phases

● Recovery, following a recession phase. Investment and speculation are popular during this time because their prices are low, promising a good return for investment.

● Expansion. The market has recovered fully from the recession. A vacancy is low, rent is on the rise, and new constructions spring up. Renovations take place and rentals are high.

● Hyper supply. As supply catches up with demand, vacancies will rise. Some real estate investors may look to a buy and hold approach to property in anticipation of another recession. They will look for long-term leases.

● Recession. Demand plummets due to oversupply. Investment is possible because properties will be at rock bottom prices.

The market is never still and is irrational

It’s important to learn quickly that the market never stays still. Periods of either substantial growth, or troubling downturns will eventually subside. “One of the worst things that can happen to a beginning investor is to get it right the first time because you then think you’re smarter than you are”.

Rather, experienced investors ply their trade in response to market fluctuations. Things change quickly and are driven by the irrationality of investors. “Property markets aren’t only driven by fundamentals; they’re often driven by the irrational and erratic behaviour … of investors”.

Taking things into perspective matters here says, Michael. “Never get carried away too much… never get too disenchanted by the property slump.

Follow a proven system

Being able to systematically adjust to changing market conditions allows investors to make sounder decisions. Doing your research to know what key data to look out for will allow you to avoid irrationality.

“Sophisticated investors do follow a system because… it takes the emotion out of decisions. It also ensures they don’t speculate”. Having such a system means their expected return on investment stays in the black over a longer period of time. “It may be boring but it makes it profitable”. In fact, such a system tends to separate good investors from those who just get lucky.

“Almost anyone can make money during a property boom,” says Michael, “but many investors without a system… find themselves in financial trouble when the market turns.

“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.”

Market volatility leaves investors vulnerable

The natural cycling of the market can make investors targets for exploitation. During periods of decline, many doomsayers will appear, saying that the market is going to crash.

“Often, [doomsayers] have an agenda of selling a book or course… These are powerful emotions and one the media uses to grab our attention.” Michael adds “Sadly, some people miss out on financial independence because they listen to those messages.”

Likewise, when there is a property boom, investors can go chasing fast-money schemes.

“You really have to own the correct assets and try not to get influenced by the latest ‘get rich quick’ scheme.

“I know [they] are compelling, I understand they are hard to resist, but … they pander to those people who want to give up their day jobs.” A better strategy is to go back to your values, and avoid irrationality: “Patience is an investment virtue”.

The Bottom Line

Michael sums it up for us:

“Cycles are inevitable in any investment market, and our property markets are behaving normally. They’re working their way through the cycles.”

“You don’t really have to try and pick the cycle; just stick to a proven strategy and when your finances are ready, get to the next property.”

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