For the vast majority of Australians, their home or investment property will be their biggest investment. As a result, there are few places on earth where the love for real estate is greater than here in the Grande Terre du Sud.
Real estate is a more intuitive asset class than stocks, derivatives, bonds, currencies and cryptocurrencies. If you are so inclined, you can reach out and touch real estate. The demand is logical, because housing is a basic human need and if our population increases, so does the demand for housing.
The problem with the tangibility of real estate is that many people underestimate it. In essence, if we can touch it, it doesn't seem to be that complex.
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This inspired the emergence of what we call the backyard property guru. You know the guy: someone with limited real estate investment experience (if any) who has firm opinions on the viability of your investment strategy regardless of its complexity.
Another challenge we face as humans is what is called the short term. Consider the notion of time value of money, which tells us that money becomes less precious to us the more we have to wait for it. Children's psychological studies playfully reproduce this with treats: you can have one now or two later. If you are not a connoisseur of finance or psychology, you may know the hit song by Queen in 1989 … "I want everything, I want everything, I want everything, and I want it now ! "
The short-term paradox
An excessive short term is the source of great global socio-economic challenges. CEOs admitted to neglecting long-term innovations in favor of investments that would boost profits in the next quarter. Politicians are encouraged to create short-term prosperity in order to maintain their popularity – the mess they leave behind is the next problem.
The global financial crisis has also been blamed on rampant short-termism. Since then, concepts such as triple bottom line and quadruple bottom line have begged leaders to consider results beyond the next quarter.
As Australians, we are not only subject to the very human tendency to accelerate gratification, but also to unique cultural factors that make us more prone than others. In a book published in 2010 by the famous organizational anthropologist Geert Hofstede and his co-authors, data analyzed from the World Values ??Survey rank Australia 77th out of 100 countries with a long-term orientation. With an index score of 21, our short-termism is among the tastes of Nigeria (13), Rwanda (18), El Salvador (20) and Mexico (24). Not only are humans inclined to prefer something now rather than later, but we Australians are among the worst offenders.
It is not surprising that our short-termism and our obsession with real estate lead to unfavorable results.
Consider the tilt of the largest block of real estate transactions to occur during a boom, which then serves to further fuel the boom. The short term comes through the attraction of owning an asset on an upward price path.
However, ultimately, changing demand-side factors such as affordability, employment or access to credit halt this boom. You better hope you didn't buy at the top with a lot of others!
Another example of short-termism on the real estate market is one that disposes of its assets in a few years. Following an unflattering bank assessment, market assessment, or headline news, these people fear the future may look like the present. Then the unfortunate choice to cut their losses and sell will generally follow.
Pain and gain on the real estate markets
The Pain and Gain quarterly report by CoreLogic offers a documentary overview of the prevalence of the short term on the real estate market. According to a statement released in 2019, resales at a loss in Australian capitals took place as little as half the length of the for-profit resale.
Adding to the complexity of a real estate investment strategy is that price growth is not linear. Various factors can contribute to the value of a property increasing and decreasing over time.
For a real estate investor, the goal should be to maximize the gap between the purchase date and the sale date. Other factors invariably come into play to facilitate this, including rental returns, available tax offsets, buyer income, risk profile, etc.
If a real estate investor enters the market with expectations of linear or direct price growth and rapid passive returns, they are probably preparing for failure.
A long-term holding strategy, which, according to the evidence, is the most effective approach to property investment, will no doubt involve periods of falling prices, oversupply, lower rental yields, defaults and others. Being prepared for these eventualities is the very meaning of the word "strategy".
Luke J. Graham is an analyst of organizational behavior and the real estate market. He is currently completing postgraduate studies at the University of Oxford.
