How to be a contrarian property investor

This has been a year in which many prospective clients have walked into my office carrying some real baggage. And who can blame them?

This has been a year in which many prospective clients have walked into my office carrying some real baggage. And who can blame them?

The interesting thing I’ve observed in my 20 years advising on property investment is how differently people react when the mood changes; the different personality types come out clearly.

Some arm themselves with the facts; for others the daily news is irrelevant – they have the big picture in mind and the sun will always shine. For others still, the world is about to end and nothing can be salvaged, even though these people are the same ones who told me how easy it was to make a fortune at the top of the cycle.

Most interesting of all, though, are the contrarian investors.

No matter what the rest of the world is doing, contrarians see opportunity where others fear “disaster”. So when the investor herd is up and running, the contrarians stand still and wait… until the herd begins to lose momentum.

At first glance, contrarian property investing seems to be all about market timing, but in reality the genius is to look past current sentiment and concentrate on what really matters.

And it works, time after time, no matter how bad the headlines are, because despite all the opinions being bandied about during any phase of the property investment cycle, the decision that matters is not when you buy, but what you buy and how long you hold it.

To understand the mindset, it’s useful to go back to one of my first clients. “David” first came through the door in 1984; he had saved $20,000 and wanted to invest in property. He was by no means wealthy and didn’t have a particularly well-paid job. What he did have was an unemotional approach to investing and an openness to taking advice.

David’s first purchase was a two-storey terrace house in Melbourne’s inner-north “university” suburb of Carlton, bought for $118,500. It’s now worth about $1 million.

Then came 1985. Who in their right mind was buying property in 1985? That was the year capital gains tax was introduced and negative gearing was quarantined. The headlines said Mass exodus from property market, but David wasn’t deterred. He paid $40,000 for a one-bedroom apartment in South Yarra with a favourable outlook. Just as well, because negative gearing was re-introduced and property values soared. (It’s now worth about $400,000.)

In 1992, in the depths of a recession with high interest rates and rising inflation, David bought a two-bedroom unit in Prahran for $107,500. It’s now worth about $450,000. He then returned to his original hunting ground, Carlton, to pick up a two-bedroom Victorian cottage in 1995 for $166,000 (now worth about $700,000).

Once again, 1995 was ostensibly the wrong time to buy because supposedly there was no capital growth to be had. Technically speaking, it turned out to be the bottom of the cycle.

Remember 1999? We were in a boom dot-com sharemarket and people were saying “don’t buy property”. Interest rates were going to go up, and the GST was being introduced the following year. That year, David paid $222,000 for a two-bedroom art deco apartment in Hawthorn, in a group of eight units.

David’s latest purchase was in 2002, and if you believed the conventional wisdom the timing was all wrong again. There was talk of a so-called property bubble and the market about to go belly-up. You may remember the UBS Warburg report that predicted property prices would fall by up to 36% right across Australia!

Well, amid all that commotion David paid $297,000 for a one-bedroom art deco apartment in a tightly held complex in East Melbourne. The apartment is now worth about $450,000.

Over the past 24 years, David, the contrarian focused investor, did not try to time market conditions and was not spooked by economic, investment or political cycles, neither was he disturbed by alarmist commentary. He just bought when he could afford to. His portfolio consists of six properties with the right features, located in areas where demand from home buyers, investors and renters continually outstrips supply.

In 2008, clearance rates in Australia’s capital cities display a sober climate, but not an impending doom as depicted in some newspapers. The lower clearance rates indicate appropriate caution from would-be buyers, not a massive oversupply of property.

What property investors do need to know is that capital city markets have now become multi-layered and multi-speed and property values have stopped performing uniformly. And they’ll never be uniform again.

I see many first-time investors lured by speculative new developments that contain few, if any, of the drivers of performance. Many first timers start investing with a bargain mentality and are often induced by tax breaks, accelerated depreciation schedules and rent guarantees to buy units that produce little growth.

Many other investors buy a property just like the one they live in, typically towards the end of peak performance phase. These people have been turned on by talk of the “boom” and figure if their house has gone up in value then surely another one just like it will, too.

All too often, these investors find themselves with values retreating on their investment property and home just two years after their investment on a “sure thing” while their financing costs are also on the rise.

What I advise people to do, day in, day out, is to invest in the same way as my contrarian clients. Get sound independent advice and buy quality houses and apartments in the right locations where they can always be rented out and will always appreciate overall, despite recessions, inflation outbreaks, sharemarket crashes and sub-prime crises.

Just quietly, there’s a funny thing going on in property investment land. It seems as if a silent call has gone out and all those hibernating contrarians of the world are starting to come out of the woodwork and through the doors of our office again. The buyers may not be bidding as we speak, but sure as heck, they’re out there watching and ready to pounce. David is out there too!

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

This article first appeared on Eureka Report