{"id":7030,"date":"2018-12-12T08:30:48","date_gmt":"2018-12-11T22:30:48","guid":{"rendered":"https:\/\/www.prosolution.com.au\/?p=7030"},"modified":"2018-12-12T08:30:48","modified_gmt":"2018-12-11T22:30:48","slug":"psychology-of-investing-house-prices-fear-mongering","status":"publish","type":"post","link":"https:\/\/wealthcoach.com.au\/stage\/psychology-of-investing-house-prices-fear-mongering\/","title":{"rendered":"The psychology of investing: house prices and fear mongering"},"content":{"rendered":"

Last weekend, The Australian newspaper<\/a> published the blog<\/a> I sent you last week where I predicted that the property market is close to the bottom and that prices next year would either be unchanged or improve slightly. Well, that article received over 60 comments and none of them were complimentary or supportive of my prediction. Upon reflection, I wanted to share some very important comments and observations.<\/p>\n

Be aware of the story you are telling yourself<\/h3>\n

I am almost certain that 95% of the people that commented on my article have never invested in property and probably never will. They desperately want to prove that their decision to not invest was correct; \u201cSee, the market is about to crash. That\u2019s why I didn\u2019t invest!\u201d. So, when there\u2019s an opportunity for support the idea that investing in property is destined for failure, they jump at it.<\/p>\n

Successful property investors tell themselves a story too. Most investors will say that the market will be fine in the long run so there\u2019s nothing to worry about \u2013 it\u2019s all just media hyperbole.<\/p>\n

With this in mind, I would like to make two points:<\/p>\n

Be careful that you don\u2019t fool yourself<\/h4>\n

Once you understand that humans are susceptible to only seeing things (data, media, ideas, etc.) that validate the story we are telling ourselves, you must be careful to not be too one-eyed. One of my favourite sayings is \u201chold strong opinions, loosely\u201d<\/em>. Always leave room for the idea that your story could be wrong.<\/p>\n

Be careful who you listen to<\/h4>\n

It is interesting to note that the economists that don\u2019t invest in property themselves (personally) tend to always hold negative views about the property market. The ones that do invest in property tend to be more balanced. Also, negative property views make perfect clickbait and some commentators have built a career out of holding perpetual negative views \u2013 because it garnishes media attention. So, be careful who you listen to.<\/p>\n

In short, people that voice very strong views tend to do so to defend (validate) past decisions.<\/p>\n

The chorus is getting stronger for a loosening in credit policy<\/h3>\n

Even over the past week, the chorus of people that are saying that credit is too tight has been growing and getting louder. Business leaders, economists, RBA and media are all saying that it\u2019s a threat to the wider economy, not just property. My view that credit will loosen in 2019 becomes firmer as the weeks pass.<\/p>\n

Negative gearing might not even be banned if the ALP wins<\/h3>\n

Last week Bill Shorten said<\/a> that he may delay the implementation of negative gearing until as late as mid-2020. This is the first time that Mr Shorten has hinted at a possible delay. Perhaps the ALP is slowly backing away from its policy especially in the face of a weaker property market.<\/p>\n

The cash flow impact is totally offset by low interest rates<\/h3>\n

I make this point mostly as an interesting observation rather than trying to make a water-tight financial argument. It is interesting to note that the cash flow cost of a $650k investment property with no negative gearing at current interest rates is still less than when rates were 7% p.a. with negative gearing.<\/p>\n\n\n\n\n\n\n\n\n\n\n
 <\/td>\n\n

5% interest rates with no negative gearing<\/p>\n<\/td>\n

\n

7% interest rates with negative gearing<\/p>\n<\/td>\n<\/tr>\n

Gross rental income<\/td>\n\n

\u00a019,500<\/p>\n<\/td>\n

\n

\u00a0\u00a0\u00a0\u00a0 19,500<\/p>\n<\/td>\n<\/tr>\n

Less: <\/em><\/td>\n <\/td>\n <\/td>\n<\/tr>\n
Property expenses<\/td>\n\n

3,900<\/p>\n<\/td>\n

\n

3,900<\/p>\n<\/td>\n<\/tr>\n

Interest cost<\/td>\n\n

34,125<\/p>\n<\/td>\n

\n

47,775<\/p>\n<\/td>\n<\/tr>\n

Pre-tax loss<\/td>\n\n

18,525<\/p>\n<\/td>\n

\n

32,175<\/p>\n<\/td>\n<\/tr>\n

Negative gearing benefit<\/td>\n\n

0<\/p>\n<\/td>\n

\n

12,548<\/p>\n<\/td>\n<\/tr>\n

After tax cost p.a.<\/td>\n\n

18,525<\/p>\n<\/td>\n

\n

19,627<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Were people saying that investors would dry up when interest rates were over 7% in the early 2000\u2019s? Was there as much hysteria about higher interest rates as there is about negative gearing?<\/p>\n

Of course, at some point in the future, interest rates will increase, and, in this situation, negative gearing would be very valuable. However, a property investment won\u2019t produce a negative cash flow forever \u2013 its normally only material in the first 5 to 8 years of ownership. After 8 or so years, a property typically will not produce a material negative cash flow. If interest rates are lower for a longer period of time, the banning of negative gearing will have less of an impact.<\/p>\n

Focusing on tax laws promotes (incorrect) short term thinking<\/h3>\n

Tax laws don\u2019t drive property markets. Supply and demand drives markets.<\/p>\n

The Australian market is arguably neither in over or under-supply \u2013 we have enough houses. Demand however is growing. It is stimulated by overseas migration and interstate migration in Victoria and Queensland. It is this imbalance of supply and demand that will push prices up in the long run \u2013 particularly in locations close to the CDB as these are better serviced by infrastructure than outer suburbs. That is the difference between Australia and the rest of the world. Infrastructure in suburbs 30 kms from the CBD is greatly inferior to that in a suburb that is 8 kms from the CBD. The only thing that will solve the housing affordability issue is a massive infrastructure spend \u2013 so living further away from the CBD is less of an impediment.<\/p>\n

However, the common argument is that if negative gearing is banned, the number of property buyers will significantly reduce. However, less than 9% of Australian taxpayers invest in property. That leaves over 91% of taxpayers \u2013 or would be property owners \u2013 totally unaffected by any changes to negative gearing. In addition, not all investors will be deterred by changes in tax laws.<\/p>\n

Will banning negative gearing reduce demand for property? Yes, in the short run. But that demand will be quickly replaced by growing migration and people will naturally adjust their expectations to the new tax laws. In the long run, the laws of supply and demand will dwarf any impact that taxation has.<\/p>\n

The best question is where will property prices be in 2028? Cheaper than today? More expensive? A lot more expensive? Focus on this \u2013 not what will happen in the next 2-3 years.<\/p>\n

Stick to the fundamental laws of investing<\/h3>\n

This is the reason I wrote my third book, Investopoly<\/em><\/a>. There\u2019s always a lot of noise<\/em> distracting investors. Instead of being influenced by the noise, it is best to stick to the sound fundamentals of investing.<\/p>\n

 <\/p>\n ","protected":false},"excerpt":{"rendered":"

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