On multiple occasions this past week I’ve had discussions with clients focused on a short-term property investment strategy. Reflecting on those conversations, I can’t help but draw comparisons to the speculative behaviour that to a large degree contributed to the financial crisis of 2008, which leads me to the focus of this article: the importance of ‘time in’ in reaping the benefits of market timing. The law of averages is predicated on the philosophy of a long-term strategy. We hear things like ‘the property market grows 6 per cent per annum on average’ and subconsciously make the assumption that property grows that amount every year.
What does this actually mean, though?
Over the ten years to December 2014, the median price of a Sydney apartment grew by a total of 56.9 per cent, a compounding rate of 4.7 per cent per annum. Faced with what seems like a relatively low growth figure, I can hear rumblings to the tune of ‘No way! Sydney has been booming!’
Let me break it down further. Between December 2004 and December 2008, the median price of a Sydney apartment declined by 4.36 per cent. Had you advocated a short-term investment philosophy over this period, your experience as a property investor would most likely have been grim!
Between December 2008 and December 20014, however, Sydney’s median apartment price increased by 66.2 per cent or 8.7 per cent per annum, which emphasises the advantages of a long-term strategy relative to a more speculative short-term philosophy.
To further emphasise the fact, RP Data found that of the 63,390 home sales in the December quarter nationally 88 per cent of sellers made a profit, with more than 30 per cent of all resales changing hands for at least double the purchase price. Of those homes that doubled in value, more than 80 per cent had been held by their owners for ten years or more. Residential resale profits also increased 26 per cent in the December quarter, to $12.1 billion.
Unless you have a crystal ball, a long-term investment strategy is not only advisable but a necessity.