Property prices do go down

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.

2 thoughts on “Property prices do go down

  1. This is an interesting blog post, Matt, and I agree with you about encouraging robust decision making. But your point shouldn’t be about property; it should be about morons making poor investment decisions.

    I mean, you’re talking about somebody who buys something at 140% of its value (full purchase price, plus costs, plus 4 years of interest) in the hope that it will turn a big profit in four years. If that’s your wealth creation strategy, you’re an idiot. It doesn’t matter whether you’re investing in shares, property, a business or ostrich eggs.

    On a different point, I think you should be very careful about quoting broad-based generalisations like, “Home buyers in Perth have seen no capital appreciation since August 2007”. This is complete rubbish. I know people personally for whom this is completely untrue (and I reckon we might even know some of the same people, Matt).

    Of course, the Rismark-RP Data people will argue that they didn’t mean this LITERALLY, and there are always exceptions. If so, I will make the same argument about statements like “property doesn’t go down” – which are almost never meant literally.

    1. Thanks Gihan for your detailed response. Personally I too prefer the more precise approach rather than generalisations. Investment decisions should be made based on analysis of the specific asset you have.

      Beliefs built on generalisations are dangerous. And we have enough current cultural examples of that to fill pages of articles.

      Sadly, with many people I come across this is how their investment beliefs have originated. And it is by relying on those beliefs they justify inappropriate investment decisions when I query the basis of their decision.

      So whilst I prefer precision and specificity I thought I would try an approach that challenges one generalisation with another.

      (I agree with your broader point that could be drawn from the anecdote at the start of the article. Tragically often it is very smart, highly qualified and well paid people implementing fatally flawed wealth creation strategies.)

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