The Media is a powerful mechanism that has been used through the ages to sway human opinion, to influence decisions and in certain instances to control the masses. Whilst it is true that the influencing power of the media is powerful mechanism, it is how we perceive this information that I would like to discuss. Some people state that "perception is reality". If perception is reality then common sense would dictate that if our perception is misguided then our decision making could be adversely affected as a result. This becomes an intriguing concept within the realms of Property Investment and in particular the Power of Perception. I raise this subject because it never ceases to amaze me how our perceptions can be influenced and how in my 20 years in this Industry I've seen this contribute to the most devastating of consequences. Let me give you a few examples. In previous newsletters I have mentioned that history has taught us that within the parameters of a particular property cycle we can dissect two core components. Firstly that 60-70 percent of the growth in a given property cycle will generally occur within 30 percent of the cycle. As a general rule of thumb if we look at a typical 10 year cycle, this would equate to 3 out of the 10 years being responsible for between 60-70 percent of the growth within this period of time. This period is of course is the exciting phase of the cycle. Unfortunately the bi-product is that the other 7 years is relatively boring, or often even extremely boring.
So how does that relate to the Media?
If we follow the "boom" phase of any cycle throughout Australia we find a direct correlation to a positive media portrayal of that market. Now this may sound quite obvious. If a market has gone through a boom phase of its cycle, of course the media will be positive, of course there will be good news stories, and of course Property Investment has become a topic of conversation for a lot of people.
Here lies the problem...
As a market can only boom for a short period of time and as the media report on something that has actually occurred, an alarming number of people are drawn to and somewhat compelled to investing in property within this region. Now a boom is a boom for a reason as the most amount of growth occurs within the shortest period of time. Emphasis on "shortest". By the time a large amount of investors are drawn into this market, the market has already moved. The growth has occurred and the money has been made. Her lies the second problem... History has also taught us that each ‘boom" is generally followed by somewhat of a correction. The market has actually over inflated due to the false economy at the top of the cycle. The increased activity and purchasing levels at the top of the boom has artificially inflated the price over and above where the market price should realistically have balanced out. This can and does unfortunately lead to serious consequences.
A typical example is what we observed in Perth when the Perth market doubled in value between 2003 and 2007. The media was buzzing; the perception that property was the be all and end all was amazing. The property investor late comers didn't want to miss out. Why would they as everyone else seemed to be making money and the conversations at work and family bbq's were all about property success stories. Those that did purchase at the end of 2007 or early 2008 may well have ended up horrified at their result as when the correction occurred some Perth markets experienced a drop in median house price of up to $85K in 2008.
Let's rationalise that. Large numbers of investors had made considerable amounts of money with their property values doubling over 4 years, yet a simple timing error that was strongly influenced by media perception cost some investors up to $85K in a median house price fall on top of purchase costs. If the property cost $20K in purchase costs then these investors could have found themselves in a negative equity situation of over $100K (underwater as the American's call it). And this is not the end of the problem unfortunately. If 7 out of every 10 years are generally quite boring in real estate markets then it becomes quite depressing to analyse how long it could take to address this problem.
As a company with 23 offices nationally, we can give you numerous other examples of markets where the same situation has occurred, it has become an all too common theme.
Conversely we find another interesting dynamic occurring in relation to stagnant markets. If history has taught us that 7 out of every 10 years is relatively boring, then why is that we see a 5 or 6 year stagnation period in a particular market as a reason to not invest there. Would common sense not dictate that under these circumstances we are drawing closer to the upturn and boom (obviously dependant on the core economic fundamentals of the area)?
The media however is understandably negative. The exact opposite is occurring in the media to when a market has been in the boom phase of the cycle. Once again a negative perception has led to a massive error as an opportunity to buy at the optimum phase in the cycle could now be lost.
The massive positive to all this, is that a simple understanding of property cycles can alleviate the problems associated with media perception.
As all Australian markets move at different times and invariably are at different stages of their property cycles we encourage you to do your homework here. We would also strongly recommend you view our DVD titled "How to avoid the two largest mistakes made by Property Investors" which can be sampled on YouTube athttp://www.youtube.com/user/NPAPropertyGroup or similarly contact your nearest NPA Property consultant to arrange a no obligation appointment to discuss this in more detail.
Until next time, happy investing.
Yours in Property
Chief Executive Officer