Overconfident: Time to get out of property?
Before I get stuck into the meat and potatoes of this debate, please don’t get me wrong, I like property as a long-term investment.
In fact, I love it.
But there are three reasons why property isn’t for me right now:
1. It typically involves debt.
If you have read my blog series which details exactly how I invest you’ll know I avoid debt when I invest.
As Markel Corporation’s great investor Tom Gayner says, investing with debt is like playing poker — but sooner or later someone could take your hand away from you.
2. It’s cyclical.
Property is cyclical. I’m sorry if you’ve heard this before but unfortunately, I think many Aussies are grossly underestimating this risk. (they live in a property, they invest in property, they work in construction… how does that end badly?)
There will be good and bad times to own property. Just look at apartment and unit prices in Melbourne or Sydney.
I think the returns from some types of properties will get worse before they get better.
3. It doesn’t produce enough cash.
Property rental yields are pretty low if you ask me. And negative gearing isn’t for me — I’d prefer to share 30% of my gains with the ATO then incur 100% of a loss. I like to own shares in businesses that can produce 20% returns on their investments and are likely to pay bigger and bigger dividends over many years.
This morning, I had a seasoned property valuer stop by my apartment.
The valuer has been in the property market for more than three decades.
He wasn’t predicting doom and gloom. However, he said most people are getting more overconfident about property.
They’re trying to flip a property in a couple of years based on the idea that ‘prices double every seven years’.
In one famous study, professor Robert Shiller showed that long-term US house prices returned far less than most people realised.
Morgan Housel quoted him as saying, “Capital gains have not even been positive. From 1890 to 1990, real inflation-corrected home prices were virtually unchanged.”
“From 1890 — just three decades after the Civil War — through 2012, home prices adjusted for inflation literally went nowhere,” Housel explained. “For comparison, the S&P 500 increased more than 2,000-fold during that period, adjusted for inflation.”
But we’re not in America, right? They elected Trump — not us.
Where to from here
The veteran valuer’s sentiment towards property was not reassuring.
He said his firm had recently increased the risk weightings they use when conducting valuations.
It’s easy to see why.
US interest rates are rising, banks like BOQ are pushing mortgage rates upwards, household debt is eye-watering, many construction companies are going out of business and wages growth is lacklustre.
Betting On A Decline
I know better than to ‘short sell’ the Australian dream. Many investors have come and gone saying ‘this time it’s different’.
However, you can count me out of the property race for the time being. I’m a happy renter and share market investor.
And before you go thinking I’m just cynical for missing the property boom, you should know I’m very happy to pocket tax-effective fully franked dividends and take advantage of the potential long-term growth of ASX and global shares.
Cheers to our financial futures!
P.S. Want to join our free Investor Club? You can get your hands on my analysis for free by signing up here. When you join I’ll forward you my investing ebook, “What Warren Buffett’s Investment Checklist Can Teach Aussie Investors” — free of charge. No credit card or payment required.
How Does Warren Buffett Identify Stocks To Buy?
Download our free ASX and global investing guide, "How Warren Buffett Pick Stocks" when you join Rask Group's free Investor Club! Rask's Investor Club is designed to help you become a better investor by providing unique up-to-date insights on what's going on in the investing world.
Join Owen and Rask team today. Click here to join our club & download the ebook!