I’m calling the bottom of the property market

By December 5, 2018Property Investing

property pricesI think we are very close to the bottom of the property market – if not already there. In fact, I believe that price growth next year will be neutral or positive. I appreciate that this prediction is contrary to most, if not all the predictions in the marketplace – most notably AMP Capital’s chief economist, Shayne Oliver predicted last week that property will fall by a further 15%. I explain my view below.

Predictions are useless

The largest and longest study of expert predictions was undertaken by Professor Philip Tetlock in 2003. He studied 82,000 predictions over 25 years by 300 selected experts. Tetlock concludes that expert predictions were only slightly more accurate than random guesses e.g. coin tosses. Interestingly, experts with a greater media profile tended to do worse than their relatively unknown peers – which maybe suggests you should give more weight to my prediction than Shayne Oliver’s above. 😊

My point is that predictions are worthless. In fact, predictions are dangerous. They are dangerous because they promote short-term thinking and decision making. As I have outlined in my book, Investopoly, rule number 1 is to always make long term financial decisions.

The direction of property price movements over the next 1, 2 and 3 years is meaningless if you plan to hold a property investment for many decades. In the short run, property prices are driven by sentiment and in the long run by fundamentals. And market timing has virtually no impact on long term returns as I have written about previously.

Credit to loosen

I was very interested to read the RBA’s Governor, Philip Lowe’s comments a couple of weeks ago:

“A few years ago, credit standards were way too loose, there has been a correction of that, but I am starting to be a bit concerned the pendulum might be swinging a bit too far the other way,”

This is the first signal from the government that they are worried that credit is too tight. And this issue is receiving an increased amount of attention (see this survey today) and will continue to do so in my opinion. In my mind, there is no doubt that it is way too tight and it needs to be loosened. If it is not addressed, there will be significant negative impact to not only the property markets but the wider economy.

I believe that this will become more obvious over the coming months and this will promote the government (RBA and APRA) to take measures to loosen credit throughout 2019. Especially, given 2019 is an election year. An increased flow of credit availability will no doubt assist in underpinning property prices – and ultimately lead to price appreciation in some areas.

ALP tax policies to initially stimulate the market

Based on the recent Victorian state election result, most people believe that the ALP are overwhelming favourites to win the Federal election next year. The ALP has proposed to ban negative gearing on established property and increase the capital gains tax (GCT) rate by 50% as I have explained here.

These changes apply after a yet to be determined date so there will obviously be a period of time between the ALP winning (or people forming the view that they will definitely win) and these new rules coming into force. Put differently, there will be a window of opportunity for people to invest in property and avoid being caught by these new rules.

I believe that this window of opportunity will come to the forefront of more people’s minds in early 2019. As such, I think the property market will be somewhat artificially stimulated by demand from investors that are motivated to get into the market before the new ALP policies come into force.

This concerns me for two reasons. Firstly, any artificial stimulation distorts market prices (like what happened when the Rudd government doubled the first home owners grants after the GFC). Secondly, I am always worried when investors are driven by short term concerns or opportunities to make a long-term investment commitment. The best thing the ALP can do for the property market’s sake is make the “yet to be determined date” to be 1 January 2019 (thereby closing this window).

What could go wrong

Of course, if the government doesn’t facilitate a loosening in credit and/or there’s a change in the ALP’s policies, my prediction may no longer be valid. Also, there are numerous other events that could occur that may encourage me to change my prediction.

Assuming I’m correct, what should you do?

Probably, not much.

However, if you are concerned by the abolition of negative gearing and increase in CGT rate (which, by the way, is just as costly as negative gearing in the long run), then you should consider purchasing an investment sooner rather than later to minimise the risk of being caught by these changes. If you chose to do this, make sure it’s a decision that fits within a holistic, long-term investment strategy – not an ad hoc decision motivated by short-term tax savings.

Shouldn’t I invest after these changes are made?

Some investors might be waiting until after the ALP tax changes are implemented in the hope (prediction) that property prices will fall as a result. The idea is; why buy now when you can buy the same property for less in the future? It is true that the price of some properties may fall as a result of these tax changes. However, the fall in value is almost certainly going to be temporary for investment-grade assets – but maybe longer for lesser-quality assets. Therefore, you need to decide which is more valuable, a once off saving in purchase price or a lower ongoing tax liability (i.e. negative gearing and lower CGT). The lower tax liability wins in almost every case in my view.

My final word

This is only a prediction. Predictions can make great reading and discussion points but have very limited value to investors – as I initially wrote above. Just keep that in mind.