No one wants to buy at the peak of the property market! Imagine if you buy a property and then a month later property values fall and it takes more than 2 years to recover to the amount you paid for it. That two years of holding costs (interest) for no gain. Would you kick yourself if that happened? This begs the question, how important is property market timing?
How important is good timing?
I used the graph below to pick two points in time to measure the importance of “good timing”.
You will notice above that the median property price in Sydney fell between December 1988 and Dec 1990. Similarly, in Melbourne, the market fell between December 2007 and March 2009.
I considered the question; what if you had a crystal ball and instead of buying in 1988 in Sydney or 2007 in Melbourne, you held out and purchased a property at the bottom of the market in 1990 in Sydney or 2009 in Melbourne? How much better off would you be?
The table below illustrates the difference in equity and overall percentage returns over the total holding period.
|
The value of perfect timing |
|||
| City |
Holding period |
More equity today |
Excess compound return from “timing” |
| Melbourne |
8-9 years |
$70,000 |
3.1% p.a. |
| Sydney |
26-28 years |
$52,000 |
1.6% p.a. |
The percentage returns look significantly better. However, in fact, the dollar value difference isn’t that significant at all. The investor with poor timing in Sydney still has over $860k of equity in his property (versus $915k for the perfect investor). In Melbourne, the less successful investor has $255k (versus $325k).
This suggests that timing really doesn’t have a huge impact – even if you get it terribly wrong. In fact, the longer you hold onto your investment, the less timing really matters. I propose that if you plan to hold your investment property for 20 years or longer, timing is irrelevant.
Equity could have easily been zero
Importantly, these investors that had “poor timing” could have been a lot worse off. Imagine if they hadn’t invested in property at all? In this case their equity would have been zero!
No one knows
The fact of the matter is that no one really knows where the market is now (peak or otherwise) and what it will do over the next 2 to 3 years. No one. Zero. Nil. Zilch!
The largest study of forecasts that has ever been conducted concluded that forecasters were about as accurate as random guesses (and well known forecasters do worse than the average). As Warren Buffett says, “forecasters will fill your ear but never your wallet”.
Forget about worrying about short term (possible) movements – it will paralyse you, won’t add any value and probably encourage you to do nothing. Instead, focus ONLY on long term outcomes.
Aim is to outperform the median
With the correct asset selection principals, your goal is to outperform the median price return. The median is just the mid-point after all. It includes a bunch of terrible properties and some great ones too. It is a pretty rough and arguably meaningless measure of price movements. Therefore, it makes sense that you should be able to do better than the median if you apply a fundamentally sound approach. The higher the quality of the property, the less important timing is.
So what do you do about property market timing?
Simple. Don’t read sensationalist articles and media reports about property bubbles and crashes – which are only written to sell newspapers and create fear. Instead, focus on investing in assets that have the capability (fundamentals) to be worth 4 times more in 20 years’ time. That’s exactly what wealthy people do. None of my wealthy clients have ever expressed concern about market timing because their experience has proven that time “in” the market (not market timing) together with quality assets are the only two important things which create wealth. Meanwhile the people that try to forecast what the market will do in the short term, inevitably do nothing and are a lot worse off.
