Black swans and the property market
Commentators are referring to the current crisis as a black swan event, which is something that is totally unexpected and has a major impact. Does the property market have its own black swans?
As our European forebears ventured out into other continents such as Asia, Africa and then finally the Americas, all the swans they ever encountered were white, just like the swans back home.
Because of this, it became accepted wisdom that black swans could not exist, simply because none had ever been seen. But when Australia was discovered by the Dutch, they found the impossible – black swans!
Black swans are not just examples of something that is completely unexpected. They provide conclusive evidence that we should never rely purely on past performance to make any predictions about the future.
Many property market experts rely on past performance
You might think that the existence of black swans would have put an end to the practice of relying on the past to make predictions, but many property market experts still do just that.
They often use past performance to predict the future, inventing rules such the property market cycle or the property clock, like the example pictured here.
These give us a false sense of security by making it apear that the property market always performs in a regular, predictable way, and that when prices have fallen, recovery and then growth will soon follow.
How many times have you heard spruikers talking up a property market based on how well it has recently performed? Many investors will not invest in an area until growth has actually started, believing that it must continue, because the property clock is pointing to 9 am.
Then along come the black swans, making a mockery of those predictions. Buyer demand unexpectedly collapses, or overdevelopment creates a huge overhang of listings, or renter demand vanishes and markets crash even though they were predicted to boom. In the confusion, investors retreat from property investment embittered and hurt.
These property market black swans are painful reminders that future performance is not based on the past at all. The property market works according to the laws of supply and demand, just like any other commodity and only by understanding them can we make more accurate predictions about the future.
The property market doesn’t rely on past performance
For example, the current restrictions on travel have impacted rental demand in student precincts, tourist destinations and short term Airbnb type business and holiday lettings. Not only has rental demand plummeted, but owners, desperate for revenue, are listing their vacant properties in the longer term rental markets and competing for tenants with other property investors.
This has nothing to do with the property market cycle, the property clock or past performance at all. It is the increase in rental supply combined with a drop in demand which is leading to a substantial reduction of asking rents in many locations where students, tourists, holiday makers and those working in impacted industries reside, especially our inner urban high density unit precincts.
With the collapse of these rental markets, some investors will be forced to sell their properties, even at a loss, because they can’t manage the holding costs, such as maintenance, repairs, insurance, rates, management fees and loan repayments. This in turn could lead to a fall in property prices as well as rental income in those areas.
The long-term result will be the opposite of current performance
The longer term performance of these same markets is likely to be the exact opposite of the short term impact. This is because local, then interstate and finally overseas rental demand will be restored once the restrictions are over. On the other hand, the supply of rental properties is likely to be much lower than the potential demand due to sell offs by investors and reductions in the numbers of new high density developments.
This means that property buyers are about to be handed a once in a lifetime opportunity to secure inner urban units at the most affordable prices ever. Once the crisis is behind us and the price declines have ended, these areas will start to deliver both high cash flow and the prospect of soaring price growth.
Let’s not worry about finding black swans, when we will soon be able to fly like eagles.