Last week, an article of mine on short-termism in the property market was published by Your Investment Property Magazine. Short-termism is the inclination for a group of people (culture) to focus more on their immediate wants and needs than those in the longer term. This becomes a problem when the long term and short term come into conflict, which they usually do.
Examples of short-termism are abound in everyday life: a uni student going out for drinks with friends instead of finishing an assignment, a CEO focusing more on next quarter’s bottom line than investing in the company’s continued competitiveness, or a property investor who is concerned more about making a few thousand dollars of profit now than having a passive income stream by retirement age.
This short-term inclination, mixed with a frontier entrepreneurial spirit, has been with us for a long time. The first population boom Australia experienced after European settlement was driven by a gold rush. Many of those who were unsuccessful in this endeavour stuck around and tried their hand at agriculture. Others tried speculating on real estate in the growing urban centres of Sydney and Melbourne.
Things get complicated when considering short-termism’s necessity in satisfying our immediate needs (such as safety and sustenance), enabling us to continue existence as a species. Essentially, there’s no point thinking strategically about your long-term future when there’s a snake at your feet or an enemy tribe in your midst. For that, you need an absolute focus on the present moment. Nevertheless, an excessive focus on the here and now with something less threatening, like a property purchase, becomes a big problem.
It might seem quite obvious that homeowners and investors benefit from a long-term focus, but the symptoms of short-termism are endemic. For many years, we have reminded our event attendees that you are ten times more likely to double the value of your investment if it is held for over 10 years. A 2019 report from CoreLogic reaffirms the value of a long-term orientation, with the median hold period of loss-making property sales almost half of the hold period of those which made a gain.
How to avoid short-termism
Undoubtedly, having a proverbial snake at your feet demands a short-term orientation. As a property investor, it is therefore advisable to prevent contingencies like this occurring or at least being prepared for them so you’re able to maintain your long-term perspective. Planning to hold an asset beyond a ten-year timeframe means you should be prepared for occurrences such as:
- Supply fluctuations in your local market which could lead to temporary periods of oversupply and undersupply.
- An unsavoury tenant who causes excess damage or reneges on their obligation to pay rent.
- Changes to credit, which could change your mortgage repayments and influence the ability for buyers to access credit themselves.
- Economic crises, which may come in the form of global downturns such as the GFC and coronavirus pandemic.
- Fluctuations in rental income and house prices as a result of the above factors and others.