The Short Term Hold Fallacy

If there’s one thing I can say with certainty about property investment it’s that it must be viewed as a long term hold strategy. No, I don’t mean the Gen Y version of long term that invariably is no longer than the length of a high school relationship, I’m talking ten years at the bare minimum.

I get that Gen Y aren’t to blame for having this condensed version of ‘long term’. For the most part, they’ve only had the benefit to experience a mining generated economic boom and generally positive movements in property markets, spearheaded of course by Sydney. Shows like the block, whose central message is the quick gains that can be made through property, have much to answer for too.

I write this blog in response to all the questions I get that go something like this; ‘I bought my property two years ago and it’s increased by only 5 per cent, should I sell?’. My answer is always a resounding ‘no’ (unless of course a change of circumstances dictates as such).

I learned very early on, by familiarising myself with my parents’ investments, that property markets move in cycles. One example comes to mind; in 1996 my parents bought an investment property on the northern beaches of Sydney. In the eight years to 2004, the property’s value (more accurately, price) almost doubled. Had this been my only experience of property, I’d no doubt be an advocate of a short term hold philosophy, and this article would be titled very differently. In the subsequent six years, however, they would’ve made a higher return had they kept their money under the bed.

Analysis of 2015 December quarter housing sales paints a clear picture:

Sales that made a loss: held for 5.9 years

Sales that made a profit: held for 10.2 years

Sales that doubled: held for 16.8 years

Seventeen years might seem long but that’s still a 4.2 per cent annual growth rate on the total value of the property and 11.2 per cent on capital invested (your deposit) given the contribution of leverage.*

The moral of the story? Unless you have a crystal ball, a long term hold strategy is not only advisable but a necessity.

 

*Say you buy a $500,000 property that doubles in value in seventeen years, equating to an annual rate of 4.2 per cent. The return on your investment, say a $100,000 (20 per cent) deposit is calculated as follows:

Debt amount = $500,000-$100,000 = $400,000

Value in seventeen years = $1,000,000

Return = value – debt = $600,000

Return on investment = (return/investment) – 1 = 500 per cent

Annual return = 11.2 per cent


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