Short-termism is an interesting phenomenon that has strengthened in severity in many aspects of human behaviour since the turn of the millennium. Even the highest echelon of multinational business is regularly criticised for their short-term mindsets, known as ‘corporate short-termism’, and for the negative influence this has on both the economy and society in general such as the global financial crisis. The challenge of encouraging property investors to continue holding their assets has also become more complex. This tends to happen for two reasons:
- The asset has performed reasonably well for the first few years which breeds temptation to ‘cash out’ and spend it on something like one’s own home, a new car or an exuberant holiday.
- The asset has performed poorly for the first few years which breeds temptation to ‘cut losses’ and try to start all over again.
Last week we looked at the effect of sales volumes on the Parramatta apartment market. This week we will stick with the same market for the sake of comparison. If you had purchased in 2003, the median sale price of apartments was $316,500. Five years later, the median price only slightly increased to $321,500. If you factor in inflation, the stamp duty you paid at purchase, other purchase costs like legal fees as well as the agent commission for selling, you are considerably worse off by tens of thousands of dollars for making this investment.
Ten years after the purchase, however, the median sale price of apartments was $500,000, and in 2015 the median was almost $660,000. The rent has likely also increased in this time, which has a positive effect on your holding costs.
Of course, there are going to be personal circumstances that can make holding the asset more difficult, but what can be drawn from the historical residential property market is the longer you hold the asset the better off you are. We will explore this over a longer period of time in our upcoming mail-out newspaper, so stay tuned!