A man wants to buy a house in Tauranga.
He brings along a friend for a second opinion. The house they visit is, in his eyes at least, a pretty good deal. $600,000 for two bedrooms and two baths.
But the house is older…built back in 1971.
Now, it doesn’t matter whether or not the house is his primary residence or a secondary property. The fact remains — it’s a big chunk of money. It’s a major investment. One that will affect him for years to come…so he’s taking the decision seriously.
He and his friend park out front and walk around the outside of the house. They spot long jagged cracks along the foundation.
‘Could this become a problem?’ he asks.
His friend replies, ‘Who knows? It could be a problem tomorrow or 10 years down the road. You can’t time these things. Don’t let it affect you.’
They move along and spot the boiler. ‘Made in 1971’ it reads. A thick patina of rust and grime covers the aged machine.
‘Could this become a problem?’ the man asks.
The friend replies, ‘Maybe. But it seems to be working fine now. You can’t time these things. Don’t let it affect you.’
As they step towards the rear garden, they look up at the roof and see shingles missing, a bit of rot in the exposed timber and several holes where animals have made their entry.
Again, the man asks, ‘Could this become a problem?’
The friend responds, ‘Potentially, sure. But the current tenants haven’t complained. It seems like this roof could have a few more good years in it. You can’t time these things. Don’t let it affect you.’
So the man buys the house.
The next year, the foundation slides, the boiler blows, and the roof caves in.
Now, Money Morning NZ readers are a smart bunch of folks. They wouldn’t ever let something like that happen. Right?
They’d see the signs and make an educated guess that the end is nigh for this house. They’d know to walk away and seek out a different opportunity.
Frankly, it’s hard to imagine how anyone could fall for such stupidity.
And yet, the number one piece of advice I hear when discussing property is:
‘You can’t time the market. Buy now.’
What a bunch of bull…hogwash…baloney…malarkey…phooey…poppycock. It’s downright one of the WORST, most DANGEROUS pieces of advice one could utter.
You can absolutely time the market. You might not be able to mark the day or month or even the year. But you can certainly read the signs and observe that something’s not right. You can see that similar property markets are falling like dominos around the world…and New Zealand’s sitting blindfolded at the end of the line, saying, ‘Don’t mind us.’
Eventually, this market will fall, and when it does, a whole lot of Kiwis will be calling up their friends, saying, ‘You convinced me to buy this shack! You told me that you can’t time these things. Now I’m sleeping in the garden in a tent!’
They ignored the signs. They ignored common sense. They bought at the top. And they’ll languish at the bottom.
I know this is something you may be working through right now. Or at least someone you’re close to.
I’ve read hundreds of letters from your fellow readers asking for guidance on how to handle potential property purchases this year. I know it’s a big conundrum.
So here’s my humble advice…
- Seek out as much data as you can.
As an investor, your greatest asset is information. You need thorough research. You need statistics.
Without that, you’re shooting in the dark. You’re gambling.
With information, you’re able to upgrade that random bet into an education guess into an informed decision. You’ll not only get a better value for your dollars, but you’ll have a clearer idea of how that investment will pay off in the future.
You’ll be like the man in Tauranga, seeing the issues and calculating how that could cost him in upcoming years. If it doesn’t add up, you can walk away.
- Ignore those who’d encourage or discourage you based on emotion alone.
If I’ve learned anything about the New Zealand property market, it’s that it is highly emotional. Almost ideological. An intrinsic element of the Kiwi dream. Folks don’t buy houses because they’re necessarily smart investments; they buy because it’s what successful Kiwis do.
It’s what their parents did. It’s what their co-workers are doing. It’s what the mainstream media encourages us to do.
And it means there are a lot of homeowners out there who will be quick to echo what they’ve heard. If you ask whether buying a house is prudent right now, you’ll get a lot of shrugs, nods, and you-can’t-time-the-markets.
Your best path as a savvy investor is to balance that noise with some cold, hard numbers, especially high-level macro concepts like rent-to-income ratios, price-to-income ratios, and price trends.
- Appreciate that markets are cyclical.
Lastly, you must understand that what goes up must come down. There’s no such thing as a bulletproof market. Everyone eventually pays the piper.
It’s true that markets tend to increase over the long-term, but it’s possible your time horizon doesn’t extend as far as a recovery might.
For example, let’s say a crash does happen and happens in two years from now. Past examples from other countries show that it could take a decade or more to recover back to today’s price level. If you wanted to retire in eight years, you could easily find yourself under water on your house…
It’s a real threat. And it’s one I fear too many ignore.
Arm yourself with information and avoid the claptrap of ‘You can’t time the market. Buy now.’
Editor, Money Morning New Zealand