Sounds ridiculous, doesn’t it.  However, that is exactly what is happening in the Australian property market right now.  Property never seems cheap (because it is such a large asset)… except in hindsight, when it ALWAYS seems cheap.  How many times have you heard the phrase “I wish I’d bought 10 of those properties, they were so cheap, but at the time I didn’t realise.”

 

I believe in many parts of Australia, property is cheap right now.  However, most investors are holding back and letting peak buying opportunities evaporate.
Why? Because investors are being run by their emotions.  They are paying too much attention to the media – and that is just about the worst thing they can do.  That is how “herd” mentalities are created. 

 

Experienced investors aren’t making this mistake.  They know we are in a peak buying period, due to factors such as property supply shortages, falling interest rates and rapidly increasing rents. In addition, other factors such as the increased Federal Government investment in the First Home Owners Grant will continue to put a floor under property prices.

Yes, the credit crunch is making it more difficult for some to get finance, however, I believe the media is overplaying that card.  I was at an industry briefing last week where Craig James, the Chief Economist for Commonwealth Bank Australia, stated the bank had plenty of funds to lend to customers with demonstrated serviceability.

 

We expect to see property prices in certain areas increase as we move through the first quarter of 2009, particularly in the Sydney and Brisbane apartment markets.  At that time, we will see more investors come into the market, causing further price increases and effectively dampening the peak buying conditions we are seeing right now.

To illustrate my point, take a look at the emotional investor rollercoaster below.
 
THE EMOTIONAL INVESTOR ROLLERCOASTER

 

 
See that point right at the top of the cycle, when investors are in the “euphoria” stage? 

 

That is effectively the top of the market in terms of price.  And it is also the bottom of the market in terms of buying opportunity.  Let me be clear, this is not the part of the cycle to be investing in.  Yet, so many people wait for these conditions before they buy because they feel there is “safety in numbers”.  One thing is for sure, when you hear the taxi driver telling you to invest in a certain property area, you can be sure that market is topping out!

 

Instead, investors should be looking to buy at the bottom of the cycle. See that point on the graph marked “capitulation”?  That is when the peak buying conditions occur.  It is also the point that requires the most courage because this is the point where the media will be paranoid, your friends and relatives will be negative and there will be a lot of fear in the market place.  However, this is also the point where that big red SALE tag is swinging off the front door knob of investment properties and the greatest capital gains can be made.

This is called “counter-cyclical investing” and it is how professional investors make their money.  Take Warren Buffet, one of the richest men in the world.  He says, “be fearful when everyone is greedy and greedy when everyone is fearful." 

I want to tell you a little story about Potts Point in Sydney in 1996.  Now that a good deal of time has passed since then we can get a sense of the “insight of hindsight” I was talking about earlier. 

 

Today, Potts Point is an exclusive suburb, only for the rich.  But in 1996, very few people wanted to invest in that area.  Being right next door to Kings Cross, which is known as a seedier part of town, it was not considered safe or desirable.  Our research pointed to the imminent gentrification of the area and showed it as a location offering peak buying opportunities (ie the bottom of the market).  We advised investor after investor to look at Potts Point.  Very few could get over their emotional reaction to the area. 

Those who listened to the research made an informed decision to buy.  One client purchased a two bedroom apartment in Potts Point in 1996 for $420,000.  Now, in 2008, that apartment is worth $1,950,000 (a 364% increase or a compound annual growth rate of 13.65%, which is well above the national average).  Those who waited for the area to become desirable missed out on the capital growth gained from entering earlier on in the cycle and now, most people cannot afford to invest in the area.

The key is getting good information.  Find experts who can advise you about what is really going on in the market.  Learn how to identify areas of value and opportunity and try to avoid making emotional buying decisions, especially if everyone around you is doing the same.  Be a counter-cyclical investor.  Buy in the buyer’s market.  The majority of new or emotional investors buy in the sellers market when prices are at their peak.  Remember, in property investing, in terms of peak buying opportunities, the bottom really is the top.

 

Dr Tony Hayek is one of Australia’s most influential property experts.  His business, Pulse Property, provides property research and stock selection to many of Australia’s leading financial planners, accountants and other industry professionals. www.pulseproperty.com.au