Successful investors follow the strategy of buying and holding, rather than trying to time the market. Time in the market will always beat trying to time the market.
The Australian auction market has started 2024 strong, with clearance rates above 70 per cent.
This is positive news for sellers given that a balanced market for buyers and sellers is about 65 per cent – anything above this favours the seller.
This week I’m more interested in digging into the ‘data behind the data’ so to speak.
Let’s consider that the top-selling auction purchase in Sydney a week ago was a 251-square-metre block of land in Paddington with an unrenovated, terraced house on it.
The home sold for $9 million under the hammer; this same property last sold in 1981 for $300,000.
Forty-three years ago, Sydney’s median house price was $84,700. For a $300,000 sale, that was three-and-a-half times the median house price.
Today, a $9 million sale is six-and-a-half times the median house price.
It is worth noting that the Paddington property grew by 8.2 per cent per annum compound.
When you consider that the inflation rate during this same period was 3.6 per cent, it means that the inflation-adjusted rate of growth was 4.6 per cent per annum compounding.
The returns would have been even more lucrative if the owner had used financial leverage, and if we factored in the rental returns over time – houses in this street lease for $2,400 a week.
Did this Paddington property outperform the median? I would say no. It’s a typical trend. This is where house price data can be a little misleading. Another real-time example is a $2.51 million property sale in Castle Hill, Sydney. A traditional two-storey family home on an 849 sq m block.
The same property last sold in 1990 for $175,000. The median house price in 1990 was about $175,000. By selling for $2,515,000 recently, it sold for 1.8 times the median house price.
The Castle Hill property grew at the same rate as the Paddington property (8.2 per cent compound).
The inflation rate since 1990 has been 2.6 per cent, and this means that the inflation-adjusted rate of growth was 5.6 per cent per annum compounding.
The same principles apply when it comes to financial leverage and rental returns.
Drilling down on the ‘data behind the data’ speaks to two fundamental principles of real estate investing:
1. To compare property price data over time can be a little misleading. It’s like comparing an apple with an orange. Successful investors know that difference; rather than focusing on property prices, they will focus on what the value of their property is doing. And more specifically, the value of their land, after all, it is the land that grows in value over time.
2. Time in the market beats timing the market. Successful investors buy and hold. This approach has been advocated by Warren Buffet, one of the most successful investors in the world, for over six decades. The secret sauce of investing is compound growth, and compound growth works better the longer you hold your investments, think of it like a snowball rolling down a mountain, gaining momentum and size over time.
So, the next time you read about economists’ revisions of their 2024 house price forecast, keep these principles in mind.
