2012 will be a disastrous year for property

I’m not going to invest in property in 2012! It’s going to be a year full of crises.

Just look what’s looming in Europe. The China bubble could burst. And the US could have a double dip recession.

These were the words of two of our friends, Gill and John, as they discussed their plans for this year with me.

I couldn’t really disagree with some of their predictions about the world economy, but I did disagree with their conclusions.

Interestingly we had a similar chat at the beginning of last year and the year before…it’s interesting how the conversation seems to turn to property when we get together.

And it’s even more interesting how every year they find excuses not to invest.

They own their own home, have paid off their mortgage long ago and while they understand the need to invest to secure their financial future, they are waiting for a stress free year – a year without crisis – to get into the property market.

I explained to them that I don’t think we’ve ever had a year without a crisis. Even if the year starts out looking O.K. a terrible crisis happens every year without fail.

As they’ve owned their home for twenty years I recounted some of the crises that happened in that time – things that came out of the blue and changed market sentiment:

2011 - Floods in Queensland and Victoria, earthquake in Japan, Middle East uprisings which spread around the world, economic woes in Europe

2010 – A federal election that left us with a virtually hung parliament, European Debt crisis

2009 – Global Economy nearly collapses

2008 – G.F.C. stock market collapse, company bailouts and the Bernie Madoff scandal

2007 – Mortgage crisis in US – the beginning of the financial crisis

2004 – A tsunami hits SE Asia (it’s the first time I recollect hearing that word)

2003 – Iraq war, SARS panic, interest rates peak halting our booming property markets

2001 – 9/11 terrorist attack, Afghanistan war, economic downturn in Australia,

2000 – Dot.com bubble pops and the stock market crashes

1999  -Y2K scare, many people put major decisions on hold

1997 – Asian financial meltdown

1993 – World Trade Center bombing

1991 – The recession we had to have and a major Australian property downturn

1990 – Persian Gulf war, rising interest rates hurt property investors

I left out lots of events, but think I made my point to Gill and John – you can go back as far in history as you like and there won’t be a crisis free year. Sure some years are worse than others, but there is always bad news and much of it is unexpected.

Where investors get into trouble is seeing these as once in a generation events that will alter the course of history, when in reality they are just the normal path of history.

I asked my friends what they paid for their home when they bought it 20 years ago - $300,000.

I then asked what it was worth today, considering properties in Glen Iris, an affluent inner Melbourne suburb, had dropped around 10% in value – $1,400,000.

I reminded them of all the events that had occurred over those last 20 years and all the reasons they used not to get involved in property and then asked the most telling question of all:

“If you knew then what you know now, would you have done anything differently when you bought your house 20 years ago?” Their answer: “We would have bought more real estate.”

I then asked if 10 years ago you would have known what property values would be today, would they have bought an investment property. Sheepishly they had to answer yes.

So what is different today?

Sure 2012 will be a year of crisis and there are things lurking around the corner waiting for us. Things we don’t even know about.

There are 2 ways to handle this:

1. Sell up your assets, have a large cash buffer, hug your loved ones and wait for the sky to fall. Or…

2. Prepare for the worst but expect the best.

Do you want to know what I’m doing in 2012?

Last year I sold 3 properties that no longer suited my investment strategy and I’m actively using these funds in the property market this year. 

Some people and some companies prosper during a downturn

Remember that countries, companies and individual investors can prosper in the face of constant crises. During those last 20 years the value of properties in Australia went up by billions of dollars irrespective of who owned them.

Companies like Apple, Google and Facebook started in teenager’s bedrooms and became global juggernauts despite years of crises.

So what’s the lesson?

The lesson from all of this is:

1. Don’t panic and make emotional decisions
2. Learn from history
3. Review your current property portfolio
4. Refinance if you can to top up your financial buffers
5. Take appropriate action – whatever this may be for you:

•  Maybe you should sell an underperforming property rather than hoping it will increase in value, recognizing that the gap between your property and better performing assets will only widen
• Perhaps you should buying more properties

Of course in the short term our property markets will be driven by market sentiment and microeconomic factors.

But in the long term the value of well located properties will rise propelled by the twin factors that have always driven long term property prices – population growth and the wealth of the nation. Both of which will increase substantially.

I believe the wise King Solomon had an inscription in his ring to keep him humble during good times and give him hope during bad times – THIS TOO SHALL PASS.

Yes…2012 will be a year of confusion and concern.