Property prices do go down

Do you or someone you know hold beliefs like “property is safe”, “property doesn’t go down”, “you can’t lose money on property” and “property is the best investment”. If so, you may be a victim of our natural tendency to confirmation bias. Read this article to boost your robust decision making.

A couple of weeks ago someone was telling me about their recent investment property purchase. They had borrowed the full property price plus purchase costs. Their strategy was to hold it for about 3 to 4 years and then sell it for a substantial profit.

Alarm bells were already ringing for me – then they came out with “the worst that could happen is we sell it for what we bought it for.”

I do not have a bias for or against any particular type of investment asset, although some may interpret that I do. I favour robust decision making where the outcome is selecting the right strategies and assets for you right now. What is appropriate for you will be fluid and change over time as your situation evolves.

When it comes to residential property too often I encounter beliefs and decision making that is far from robust.

I hear phrases like “property is safe”, “property doesn’t go down”, “you can’t lose money on property” and “property is the best investment”.

Smart people believe weird things because they are skilled at defending beliefs they arrived at for non-smart reasons.”
— Michael Shermer

Naturally deceptive

Confirmation bias is one of our natural tendencies where we selectively focus on and easily recall information that reinforces our existing beliefs. At the same time we selectively ignore and forget information that would challenge that belief.

When people talk to me about residential property they seem to always have a toolkit of anecdotes they can roll-out to prove their point. Often they can’t recall knowing anyone who has lost money, or reading any news about property loses.

I know a lot of people have made good money investing in residential property in the past decade. But I also know people who have lost money, sometimes lots. And I also see the more scientific statistics of movement in real estate indices (and the indices of other asset types.)

“…thinking anecdotally comes naturally, whereas thinking scientifically does not.”
— Michael Shermer

Evidence to help you

In the interests of supporting you in making more robust decisions I am starting to collate and publish evidence to challenge the common misconception that property does not go down. Here is the first:

House prices tipped to slip in year ahead

The Weekend Australian, January 1-2, 2011 reported “…a national fall in house prices with further declines likely over the year ahead.” Read the article here

I live in the “boom town” of Perth where optimism about property investment is astounding. Yet even in Perth property does go down as reported by The Weekend Australian:

“The Rismark-RP Data house price index shows the market is weakest in Perth, where average prices have fallen by 4.9 per cent, or almost $25,000, since May.

Average apartment prices in Perth are down $44,000. Home buyers in Perth have seen no capital appreciation since August 2007.”

(emphasis added by me.)

Wow, two whole years where investors potentially had no capital appreciation to compensate them for negative cash flow (from rent not covering interest).

Selling your property for what you bought it for is certainly not the worst that could happen!

Ensure you are scientific in your research and make robust decisions about what is right for you right now.

I’ll huff and I’ll puff and I’ll…

…blow your house down.

For years I’ve been earbashed by people enamoured with investing in residential property. Apparently it’s THE best investment and “you can never lose money in property”.

Out of curiosity I enquire of these people what makes them hold that belief. Sadly most can only regurgitate the words of others and have never done thorough comparative research.

I am not against residential property investment. I am against blind faith in absolutes, especially in the area of investing.

If you would like to add some breadth to your views of property investing I recommend the following two resources:

  • Read Scott Pape’s article from the Herald Sun (20th June 2009) “Wealth starts at home” where he and Neil Jenman share some of the lies spread by property spruikers.
  • Watch the documentary “The Ascent of Money” by Niall Ferguson on ABC TV this Thursday night. This episode is about property. If you miss the show you can either buy the DVD or read the book of the same title.

Coupled with the recent publicised falls in property prices you should by now realise that ‘safe as houses’ is absolute rubble!

If you are going to invest in residential property be broad and deep in your research so that when the wolf comes along he can’t blow your house down.