Average investors get average results: Gavin McPherson
GUEST OBSERVATION
Those who have read my book or heard one of my presentations, are often struck by the juxtaposition on some of my investing suggestions. It usually goes something like this:
a) You’re a conservative investor but you recommend spending more money on property at times like this.
b) You say Sydney is the best and most robust market in Australia but when I heard you speak you are saying that Sydney is “terrible” investing right now.
c) You say you’re not a speculator, but you actually have the gall to recommend the Gold Coast market now? Are you mad?
Well. I can answer them all with yes, yes, yes and yes (the last one being for ‘yes’, I am mad!).
So let me try and explain.
Is Mr/s Average Wealthy?
I have made almost all of my wealth from investing by putting my money down when it seemed like absolutely the craziest thing to do. Think about this for a second.
The average price for a 2/1/1 unit is say Coogee/Bondi is now approaching $850,000 to $900,000. Clients of ours were buying these same units for as little as $530,000 as recently as 2012. Some of these same clients are now selling. Most are not. All of them are ecstatic with the performance of their investment(s). The prevailing rent at the time was approximately $630 to $650 per week. $530,000 for $650 per week is an excellent deal, especially in premium Sydney.
Now, saturation of the rental market has meant that these rents should arrive at between $580 per week and $590 per week within 18 months. Remember, this is an investor lead property recovery. More rental stock will mean higher vacancy rates going forward.
It is the average property investor that has driven the prices up to almost $900,000. Do you think they would be happy with their results when they wake up to realise their investment is now yielding sub 3%? I suspect not. More likely, I’d even say with certainty that the likely result is a small but immediate retreat in prices to reflect the newfound ‘wisdom’ of investors.
Keep in mind that I don’t see a larger correction (yet) while interest rates oscillate around these levels, so I’m not here to spook anyone. But investing is more about psychology than one would think.
Perception Bias
The problem of the ‘average’ investor in this scenario is that they have perception bias. World class resource investor Rick Rule cites that “expectations of the future are usually set by their experiences in the immediate past”. The punter saw $600,000 become $700,000. They saw $700,000 become $800,000. They saw a slight arm wrestle with the market in winter/spring of 2014 which might have changed their mind. But alas, the bulls won that round with the noise of interest rates pursuing their downward trend. Then the last move from $800,000 to $900,000 has sealed the deal. The averages are piling in. Remember, ’average’ doesn’t become wealthy.
Now their expectations are set. $900,000 will now become $1 million. $1 million will become $1.1 million. Rinse, repeat.
No. It. Will. Not.
This is not just illogical, wishful thinking and void of wisdom, but it also ignores a common tenant of investing in assets. A Golden Rule I have always followed as a professional investor, that being: ‘an assets value cannot be outstripped by people’s ability to afford that asset’. With Sydney-siders bordering on 55% of their household income being spent on property, (this has (historically) always been our limits...since our economy went global in 1988. If I am to be wrong, please tell me which part of the family budget will be stripped. Is it food? Education? Is it healthcare? Try telling your child they’re not getting the next iPhone?
If you are betting on this happening... you are betting against history. And if I am wrong by a decimal point, it doesn’t make me wrong to warn off investing in Sydney (or Melbourne for that matter) now. If we decide to break a record and spend 56% of our household income on property, this discrepancy wouldn’t even cover the cost of ¼ of your stamp duty.
No, my friends. Mr and Mrs Average are about to lose their shirt. I just hope it isn’t you; dear reader.
Over Committed? Is there a way out?
But now for the good news. The above scenario, while inevitable...is not ‘imminent.’ I have been forced to take a more ‘hawkish’ view of the prevailing sentiment over the past 18 months, and of course the fundamentals. Interest rates will be lower for longer. One more rate move down seems likely, but it matters not. One rate decrease equals $40 per month more affordability. If you think this changes anything try the Woolworths test. Go in and spend $40 and see how long it takes you to do it. You’ll be at the register in four minutes flat...no need for the trolley with $40 worth of goods!
For those that are over committed, there is time to get out of this mess. For those that bought a lemon, time to rethink. For those that are going to sell anyway, in say the next 4 years - maybe now is a good time to consider it. Mr and Mr Average certainly aren’t thinking too hard. They are getting pretty drunk on their own kool aid... so while they are still inebriated, perhaps sell them yours before they sober up.
They’re going to buy anyway, why not make sure it’s yours?
Is there any opportunity in the market left?
I was gratified last weekend to finally see some of the major financial newspapers acknowledge that opportunity is abound in South East Queensland, something our office has been screaming from the rooftops for almost 30 months!
“The next cycle could prove to be a super cycle driven by Chinese investment and rapidly growing tourism,”CEO of Fat Prophets Angus Geddes says. Not one to mince words, Mr Geddes also agreed with my sentiment. “I would not be touching them [Sydney, Melbourne, London, Auckland] at current elevated levels with a barge pole.” Along with Andrew Wilson, property economist from ‘Domain’ is similarly upbeat about the Gold Coast.
But of course 9 million people (Sydney and Melbourne) deserve a lot of attention, and for the past two years they have spoken. But ponder this.
For every $600,000 I’ve seen make $850,000 in Sydney, I’ll show a better deal with even more upside in Brisbane or the Gold Coast. Acknowledging that the next two years are expected to be bullish for these cities, this has not precluded great profits over the past two year either. A client of ours bought a unit 15 months ago in Kent St New Farm (Brisbane), for $343,500 (2/1/1) in a small block of six. Another apartment in the same small building (of comparable merit and amenity) just sold for $450,000, an almost 25% gain in equity for our client. Given the small entry costs, higher rental yield and continual expected growth going forward... I know what I’d prefer. To eke out the same gains in Sydney, an investment of double that size is necessary (notwithstanding that I think the average priced investment gains are over anyway!)
Similarly, a Gold Coast property boom, for all its volatility... is a truly remarkable thing to participate in for three years out of 10. Now is the season where larger developers move into the Coast and pick up the last big land holdings while they’re still cheap. In the past six weeks, six clients of ours have experienced gains in excess of 100% for their venture into the Gold Coast less than two years ago...when there was blood on the floor. To cite the most profitable deal - a client of ours paid $165,000 some 24 months ago sold for $500,000 to a developer into the well publicised Banyan Tree Resort consolidation of some $50 million. Our buyers agents located four clients in this block, and by all indicators at the time I’d like to think it was an obvious position we took in identifying this site as a likely future development site. But it does make you then wonder what could have induced the seller to sell two years ago; with a rental return of $250 per week and a low body corporate fees in such a site rife with potential.
Clearly, the factor here wasn't a fundamental one...but a psychological one.
Predictions
As the property market recovery turns now to the smaller cities, I expect to see larger profits on smaller outlays on the Gold Coast and Brisbane. Some time ahead should see the regionals follow suit, albeit with a much higher risk proposition.
While now being very bearish on Greater Sydney and Melbourne average priced properties, I expect the premium markets to thrive. It’s universally understood and historically shown that this is the way markets mature within each cycle. Markets recover in a financial sense from the “bottom up”. That is, everything that’s cheap... flies first. And in a geographical sense, the market moves from ‘in and out’. That is, from an ‘epicentre’ (high density urban) out into the out suburbs, and finally to the fringes. Also known as... ”the ripple effect.”
Stop thinking about where the money was made. Start wondering where the money will be made next.
I’ll expand on the ‘ripple effect’ in the next article and show the average investor how to truly beat the market to the next property profits. I’ll also briefly touch on the much revered “Chinese investor” and the oft-misinterpreted truth about why Chinese investment is healthy, but why it isn’t going to change your property price over the long term by any more than $1,000!
Gavin McPherson is the chief executive of Oasis Property Group.
His book, 'Value Investing in Property - What would Warren Buffet do if he was buying property in Australia?', takes aim at the get rich quick property experts and explains instead the sturdy path to wealth through value investing in property.
As a buyer’s agent, Gavin and his offices have assisted over 2,000 plus property transactions valued at well over $2 billion.
