Who’s right – the property boomers or the bubble busters?

Last weekend, Pam and I attended the wedding of a friend’s daughter and were seated next to a lovely couple we hadn’t met before. As we chatted through the night, I discovered John was a partner in a major accounting firm and a serious property investor who had grown a very significant property portfolio over the last 12 years.

What then shocked me was that John shared with me that he was considering selling up his entire portfolio, spurred on by the many property bubble predictions he was reading.

As we got more into the conversation I discovered he was concerned that the ongoing economic troubles overseas, including problems in China, were yet to have their full impact on Australia. He quoted many sources, including a popular book by US economist Harry Dent, which suggests the economies of a number of countries were going to implode.

He was also concerned that credit levels in Australia were too high, our economy would falter, unemployment would rise and the day of reckoning was ahead.

In my opinion he is listening to terrible advice he should ignore!

Of course I explained my more bullish long-term predictions for the Australian property markets and understandably he asked, “Why should we believe the current round of predictions that suggest the property markets will remain buoyant, rather than those that say the bubble will burst?”

I guess I could have replied, “Why would you now believe all those who incorrectly predicted the collapse of property and told us to sell up our properties a few years ago?” 

But instead I went on to explain that making short-term and long-term predictions about the property market can be reasonably easy, but it’s a different story with what happens in the middle.

You see…

It’s pretty easy to understand what’s going to happen to property over the next six to 12 months.

For example, over the next year property values are likely to be driven up further by the same fundamentals that have spurred the markets forward in 2013.

These include:

• Strong population growth with the majority of these people moving to our four big capital cities;
• Changing lifestyles with more people trading their backyards for balconies and living in medium density properties;
• Scarcity of well-located properties in the inner and middle ring suburbs of our capital cities;
• Low vacancy rates;
• Rising building costs;
• Relatively low interest rates and (despite what some complain about) relatively affordable housing prices;
• Overseas buyers and SMSFs continuing to invest in property;
• Increasing consumer confidence; and
• A fear that people will miss out on the current property boom.

Likewise, it’s pretty easy to predict what will happen in 10 years’ time.

We’ll have a wealthy nation and a significantly larger population (up around 20%) the combination of which is likely to cause the value of many well-located properties to double over the next decade.

But with so many unknowns ahead, so many macro economic factors affecting our general economy and so many micro economic factors affecting our local property markets, it would be a brave person who would try to accurately predict what’s going to happen to the markets in between now and then.

Of course it’s likely there will be a few years when property values will boom over the next decade, but we’ll also have a number of years when property prices will stagnate, and probably even a period when the value of some properties will fall a little.

The problem is no one accurately knows when these times will come.

We also know that over the next 10 years there will be periods when interest rates will rise and slow our property markets down, and there will be times when low interest rates will encourage home buyers and investors to hop into the market.

And over the next decade the so-called “experts” are likely to keep getting their predictions wrong.

Looking back at what many of the “experts” said twelve months ago, very few predicted the strong markets we experienced in 2013.

Remember, they were worrying about the American fiscal cliff, the meltdown of the European banking system and the slowing of China’s economy.

Maybe that’s because many of those quoted in the media are economists and analysts coming from a sharemarket perspective who analysed property much the same way as they would shares. They give a broad-brush opinion of what will happen to the property market, but it doesn’t work that way.

Some of them fail to understand that there are many property markets around Australia, with each state being at its own stage of the property cycle and dependent upon its own microeconomic factors. And then there are markets within markets within each state based on price point and geography.

While RPData reports that our combined capital city home values increased by 8% over the past 12 months, in reality our markets were very fragmented: Sydney (12.5%), Perth (8.9%) and Melbourne (6.6%) were the stand-out markets for capital gains over the year. Hobart (-1.4%) was the only capital city to have recorded a fall in values over the year and growth has been relatively limited in Canberra (0.8%) and Darwin (1.6%).

The bottom line is…

I guess it’s like a game of chess.

All the pieces are on the board, but only those who can see three or four steps ahead will win the game.

Property is a long-term play and to win you have to formulate a property and finance strategy to get you from where you are now to where you want to be in 10 years’ time. Hopefully that will be to own a multi-million dollar property portfolio that gives you financial freedom.

And, in the meantime, you have to filter out much of the distracting noise.

Michael Yardney is a director of Metropole Property Strategists, who create wealth for their clients through independent, unbiased property advice and advocacy. Subscribe to his Property Update blog.