We know that first-time investors worry about the timing of their investments. This is no surprise, given that starting at the wrong point in the market cycle may force you to start with a loss. However, when investing one must look at the long-term picture.
We interviewed Dr. Steven Enticott to understand if now is a good time to invest.
Right now, Dr. Steven Enticott believes we are in a hesitant recovery phase of the investment clock (7 O’clock)
This stage of the clock involves moving levers to stimulate cash movement in the economy. We have seen evidence of this with recent cuts in interest rates from 1.5% to 1.25% (A move not all banks passed on to customers)
Dr. Steven Enticott points to the recent Banking Royal Commission and the tightening of lending by banks, as a reason behind the slowdown in the economy.
However, lending restrictions have now been loosened by APRA, to help increase the borrowing capacity of loan applicants.
This is because APRA doesn’t see interest rates returning to a high interest climate any time soon.
At 7 o’clock on the investment clock generally there are more rate cuts. Another reduction in interest rates could be on the cards this year.
Generally, when interest rates go down and lending becomes easier, this has a flow-on effect in increasing housing prices. Dr. Steve Enticott believes Australian prices are still generally cheap.
Explaining that while Melbourne and Sydney have an affordability problem, the rest of the country is still quite cheap and Brisbane and Adelaide are seeing a catch up phase.
However, Investing in property is not a short-term investment.
Investors do not expect to get rich overnight. Instead relying on capital growth in the long-term.
In fact, the longer you hold your property investment, the less important the timing of the initial purchase becomes.
So, we looked at just what difference would getting in at the worst time and the best time make over the past 20 years.
The investor who bought in at the worst time in 2000 only missed out on 0.58% of the maximum return than had they bought at the absolute perfect time.
Making the right investment is critical
The longer a property is held, the less important timing becomes.
So, instead of focusing on timing, a keen-eyed investor should focus on the quality of the underlying asset.
History shows us that investors who wait and try to time the market, generally fail and end up worse off than the investor who acted positively and got into the market.
It’s correct asset selection that is leads to a profitable investment, rather than correct timing.
Investment property is about compounding returns.
The savvy investor knows that understanding the power of compounding goes a long way to long-term success.
Just like having funds in a savings account and having compounding interest, so too, property returns are compounding.
Just look at the following graph showing how the power of compounding increases property. In Melbourne prices have increases 8.1% on average per annum over the last 25 years. Let’s take a conservative view and look at how a compounding with 7% return plays out.
Almost 50% the returns come in the last 5 years of the 15 year term.
Some investors right now are hearing about price falls and are hesitant. However, as Warren Buffet once said “Be fearful when others are being greedy and greedy when other are fearful!”
At Dollars With Sense we have partnered with experienced and proven experts in the industry. If you are interested in taking your first step in the property investment journey, follow the prompts and we will put you in touch with one of our experienced partners who will answer any questions you have.