There’s an identical warning in the fine print for every investment or superannuation product: “Past performance is not indicative of future results”.
It’s there primarily as a risk mitigation tool, but it’s also profoundly true and something I strongly advise property investors in particular to heed.
For the avoidance of doubt (and, perhaps, debt), let’s be clear. The five-year historical trend for any given property market where outperformance occurs does not mean it will always happen again in the next five years.
I can point to the data that proves it. I can also point to the indicators you should be watching – a collection of data points and trends that can collectively flag pent-up pressure that typically precedes a market that’s set to ascend.
What’s happening now?
First, let’s take a step back and look at the underlying bigger picture. Sydney and Melbourne are cooling after unprecedented price growth, while Adelaide has been growing strongly and Brisbane, Canberra and Hobart are largely doing well, along with many regional centres.
Interest rates will certainly jump further in the coming three to six months, as the Reserve Bank attempts to cool inflation.
Naturally, many feel this will drive distressed sales into the market, which mum-and-dad investors, flush with cash after sitting at home for the past two years, are well placed to capitalise on.
But should they be driven by this thinking?
The clues, as ever, lie in detailed data analysis, which underpins every piece of advice I pass to my clients.
Not in generalised assumptions such as the one that says the past five years informs what the next five years will do. Let me explain why.
The five-year fallacy
Compare the track records of Sydney and Hobart over the past decade.
Figures from Australian Property Monitors (APM) show that from 2012 to 2017, Sydney achieved a staggering 64.7 per cent median house price growth, the highest of all the capital cities at a mouth-watering annual average of 12.9 per cent.
During the same period, Hobart grew 14.1 per cent at an underperforming 2.8 per cent per year.
If you were holding spare equity in 2017, which market would you have invested in? Let’s see what happened next.
Since 2017, Sydney has grown a grand total of 41 per cent (8.7 per cent annually) while Hobart added a whopping 83 per cent (16.6 per cent annual).
So if you picked Sydney in 2017 based on the five-year trends, you did OK.
If you looked, as we did, deeper into the property market’s crystal ball and saw Hobart beginning to warm up, you got early entry into a market that’s gone gangbusters ever since.
None of this should be particularly surprising, since markets historically follow cycles from boom to slump and back again.
But still we see investors and even high-profile pundits basing their predictions on historical trends that, demonstrably, are not reliable.
Follow the data
So what should property investors be looking at? I established InvestorKit because I love the challenge of interpreting property’s many data streams, looking for nuggets of intelligence that help our clients stay ahead of the market.
The best scenario for returns is to get into a market in the early phase of pressure accumulation rather than at the end of a decade of strong growth, when it can quickly cool as we’ve seen from both Sydney and Melbourne in recent months.
We analyse a variety of key property market indicators such as asking price, days on market, monthly listing and sales volumes, and building approvals.
We also calculate inventory, which divides the number of current listings into the monthly sales volume average; a falling number is an indicator of a heating market.
Further, an increase in vendor discount – the difference between the original asking price and the actual sale price – can indicate a market that’s coming off the boil.
The movement of one indicator might not mean much in isolation, but when you see several data streams simultaneously showing signs of a market under higher pressure, you start to pay attention.
Putting all of this together becomes even more exciting when you see it combined with positive sentiment, a rental market that is very tight with low vacancy, and an economy with job ads rising, infrastructure projects booming and unemployment falling.
In our world, this is the perfect picture.
Of course, there are no guarantees in property investment, and indicators are just that. EBut you’ll always get a better feel for any investment opportunity by following robust data rather than trusting what happened yesterday, hoping for it to be repeated tomorrow.
Especially as markets need to return to their long-term averages, which across Australia’s many markets, commonly ranges from between five and eight per cent per annum, over a 30 year period.