However, the current market is causing concern and stress for many investors who’ve never invested during times like this before.
In reality, the market is just doing what it always does – moving in cycles, meaning once this decline is over it will continue to do what it always does, and the value of well-located properties will keep increasing.
Remember the market doesn’t care!
The market is unemotional.
The problem is people care, and at this stage of the cycle emotions creep in, causing some investors to make poor decisions.
You see, just like the market moves in cycles, so do investors’ emotions – from fear to greed to fear to greed.
The recent boom was a little different.
In general, the Australian property market is driven by owner-occupiers, who make up around 70% of all transactions.
However, property booms are usually driven by investors and their FOMO (Fear of Missing Out).
Similarly, property downturns are intensified by investor fear when many stay out of the market driven by FOBE (Fear of Buying Early).
However, the “once in a generation” boom we experienced in almost every corner of Australia in 2020 and 2021 was different to other booms I experienced.
It was driven by owner occupiers upgrading their homes or moving to lifestyle locations and accentuated by pent up demand and historic low interest rates.
Nevertheless, it was still driven by FOMO as the value of houses around Australia grew faster than people could save a deposit.
And now once again fear of rising inflation, rising interest rates and the continual media commentary of a property crash is creating FOBE (Fear of Buying Early).
And if history repeats itself, and it most likely will, here are 10 common mistakes many investors will make in the current market because of their emotions:
1. Not really understanding the nature of the property cycle.
Many beginning investors don’t realise that in every property cycle there will be as many years of flat or falling property values as there will be years of rising values.
In time they’ll learn that, at least in our capital cities, all market declines are temporary, while the long-term increase in property values is permanent.
2. Not adhering to their property strategy
All the successful investors I know follow a strategy and the most successful of those have a documented Strategic Property Plan.
Of course, have a strategic plan means you won’t be swayed by the media commentary – you’ll just stick to your plan.
When tempted to jump ship and sell up, investors should focus on why they initially invested in property and what their end goal is, rather than worrying about the temporary declines or unpredictability of the property markets.
3. Changing their investment strategy
Too many investors are making 30-year decisions based on the last 30 minutes of news rather than on the fundamentals.
If your aim is to gain financial freedom, this is not the right time to change a proven strategy.
Strategic investors do what’s always worked and don’t look for what’s working now.
They buy investment-grade properties that will attract continuous strong demand from both owner-occupiers and investors in the long term, rather looking for a short-term fix in the next hotspot.
4. Believing the money illusion
Sure some Sydney and Melbourne property owners have seen the values of their properties fall 3% or even 5% over the last six months.
However, many bought their properties five or six years ago for 60% of what their properties are worth today, so rather than losing 5% they are in fact still 30- 40% better off than they were before the Covid pandemic hit us.
5. Acting on their fears
Of course, it’s perfectly normal to feel nervous about the current market downturn, especially when you consider the continual barrage of negative messages in the media that we’re being subjected to.
However, acting on your fears irrationally and selling your properties because of the market correction is usually a big mistake.
As I said, don’t lose sight of the fact that you’re investing for your long-term financial independence, so stay invested in the market.
6. Trying to time the market
Sophisticated investors recognise that even the experts can’t time the markets.
Yet some inexperienced investors want to sell up now and get back into the market again when property values pick up.
The problem is that most won’t be able to pick the right time and will just end up ‘selling low and buying high’, which is the opposite of what they hope to achieve.
Others just won’t ever buy another investment property.
7. Taking advice from the wrong people
In Australia we seem to have 25 million property experts.
While everyone has an opinion on what’s going to happen to our property markets, the problem is just because they have an opinion doesn’t mean you should take their advice.
8. Looking for the next hotspot
Rather than looking for the next hotspot, which usually ends up being the following year’s ‘not spot’, smart investors look for locations that will outperform the averages in the long term.
At Metropole our research identifies areas where properties grow at wealth-producing rates of return, which has a lot to do with the demographics of the location.
We look for suburbs where people have incomes that are growing faster than the state averages, andwe love investing in suburbs that are undergoing gentrification.
9. Looking too frequently at the value of their properties
When the property market is declining, the more often you check the value of your properties the more likely you’ll become anxious.
If you’re not selling your property it doesn’t really matter what’s happening to property values, does it?
Now I’m not saying “set and forget”.
Of course you need treat your properties like a business and regularly review your portfolio’s performance – but once a year is about right.
10. Thinking they are rational
Most of us think we’re making rational choices, but when it comes to financial matters, in reality we’re not.
So what can you learn from all this?
I guess one lesson is that the average Australian property investor gets it wrong.
Statistics show that about half of those who buy an investment property sell up in the first 5 years; and of those who remain in the market 90% never get past owning one or two properties.
So I guess the real lesson is don’t do what the average Australian property investor does.
Instead, ensure you have a plan and then use a time tested, proven strategy to grow your wealth.
Interestingly a recent audit of Metropole clients showed they were 7.3 times more likely to own six or more investment properties than the average property investor and that’s because we always start by helping them build a personalised Strategic Property Plan that contains the following components:
- An asset accumulation strategy
- A manufacturing capital growth strategy
- A rental growth strategy
- An asset protection and tax minimisation strategy
- A finance strategy including long-term debt reduction and…
- A living off your property portfolio strategy
Another lesson is that in order to become a successful investor you will need to surround yourself with a team of independent and unbiased professional advisors (not salespeople.)
A team of people who are known, proven, and trusted and who have gained perspective because they have invested through times like this; so it is probably appropriate to remind you that in changing times like we are experiencing, no one can help you quite like the independent property investment strategists at Metropole.
