Time is an important resource within property investment, just as it is throughout all aspects of our life.
And time is the topic we’ll be discussing in our third edition of our Reminiscing with Richard series.
Today we’ll be discussing the important topic of timing when buying and selling property; it’s about time in the market, rather than trying to time the market.
Yes, in the last podcasts we’ve been speaking of the importance of land in property investment, but another vital element is time.
As property investors we need to understand the importance and value of time. We need to learn how to use it wisely and not waste it.
When it comes to buying property in life, start early, and don’t squander time.
I mean, obviously no one should be putting themselves under silly pressure should they, but the earlier you can get in, the more advantageous it’ll be for you in the long term.
Absolutely, and that’s the important point about getting an early start, it comes back to our initial point, it’s all about time in the market, and not getting caught up in the often fraught endeavour of trying to time the market in regard to when to buy or sell.
Trying to time the market is problematic because the market has proven itself to be very unpredictable over the decades. It catches out even the most confident and well studied analysts. At the end of the day we don’t know whether the market has peaked or troughed, until after it’s actually happened.
Exactly, we just have to look at the ups and downs of the pandemic property market. Early on doomsdayers predicting a property downturn were proven completely wrong when the market surged into an unprecedented growth period. The subsequent market retreat has again caught many by surprise. It looks obvious now, but it definitely wasn’t before it happened.
Yes, I’ve seen it so often over the years, that a $700,000 property for example can quickly become a $770,000 property because when markets move again, they can move very quickly.
Yes, overnight, almost!
Another important aspect in understanding time is the virtue of patience. Passive property ownership is about the long-term journey. Property moves in multi-year cycles. It doesn’t consecutively increase in growth year after year. Capital growth does take a breather, but when you step back and look at it across the longer term market cycle, growth is always apparent.
While no two economic or investment cycles are ever the same, there are some common characteristics. One of the important, is interest rates, and their relationship to inflation. The independent dynamics can certainly have a big influence on property markets.
Inflation is obviously a hot topic at the moment, but for a lot of people who might have only entered the property market in the past five to eight years, inflation probably hasn’t formed a big part of their property journey, because it hasn’t been overly strong until more recently.
Absolutely, and that’s why it’s important to get a historical perspective. The Reserve Bank is always in the process of decreasing, increasing or holding rates as they work to manage inflation. In recent times, inflation has been high, so rates have been rising rather rapidly.
However, at the other end, it’s really important to remember that the top quality property investments are not reliant on inflation for capital growth. Price growth is very simply the result of underlying demand that exceeds supply. So, it’s important to note that prices have risen when inflation was low.
People can sometimes become confused when they see second rate property increasing in value. But it’s only increasing in value on the back of inflation. That type of capital growth will quickly fade away when inflation is curved.
Yes, it’s the old adage, that all boats rise on a rising tide type. But you need to be able to spot the difference.
For a longer term perspective, it’s helpful to move through the decades to look at the relationship between the property market with both low inflation and high inflation, as well as the influences of government intervention.
If we go back to the 1960s, there was strong growth, but that was in a very low inflation environment. Then if we look at the ’70s and the early ’80s, we had high inflation. In the late ’70s, borrowing rates rose from 8 to 9% to around 14%, and inflation was around 12%. Now, once again, this was a period of strong growth.
Then around 1990, rates rose to 17%, and that really sent shudders through the property market.
That was the recession we had to have, according to the Prime Minister at the time Paul Keating.
Absolutely. Then in the early 2000s we actually saw similar circumstances to what we’re currently experiencing. We saw a multitude of interest rate rises over a short period of time.
The overarching point here is that while interest rates and inflation have waxed and waned over the decades, and impacted property prices in the shorter term, when you step back and look at the price chart over the longer term, capital growth rates have remained strong.
Property is a long-term journey, where we must understand the value of time in the market.
This brings us to my next point, overcoming fear of debt.
As we’ve mentioned in previous podcasts, there is good debt and bad debt; or let’s say, productive debt, unproductive debt.
Debt is very necessary to fund a successful property portfolio. But you don’t want to put yourself in the difficult position where you can’t afford to fund the purchase of a particular property. It’s important to be able to ride out difficult economic times, when interest rates may be high and market conditions difficult.
Thus, it’s vital you equip yourself with a financial security chest and put in place measures to ensure you’re not in a situation where you’re forced to sell. That all comes back to the long-term journey, and ensuring you’re able to spend the required time in the market.
Another issue is that of government intervention, which can have a significant effect on property markets. However, typically it’s only of short term significance. People often overreact to new and proposed rules. A good example of this is the current political talk about introducing rental caps.
What tends to happen is that investor confidence falls, and there’s often a temptation to hold off from buying or even sell-up.
If we go back to the 1980s, on top of high interest rates, there was a considerable amount of government intervention. We had changes to the capital gains tax, changes to negative gearing, and the tightening of residential tenants’ legislation.
While the changes spooked many, those property investors who stood the course and continued spending time in the market were richly rewarded with the long term capital gains. Quality property always wriggles free and increases in value, and the longer the market is held down, the greater the next rise will be.
It goes to prove the overarching point doesn’t it. Time is very important, but it’s time in the market, rather than timing the market.
You should buy as soon as you can afford to. From there spending time in the market allows the property to work for you, so you can take advantage of the equity that’s built up over the long term.
Yes, time is such a valuable and important resource. It’s irreplaceable, so using it wisely has a profound impact on how you create financial independence and security for the future.