Property Investment
3 min read
Author: Andrew Nicol
Founder, 20+ Years' Experience Investing In Property, Author & Host
This is the number one mistake I see investors make.
They look at the past and think it predicts the future.
So you see an area or region that’s booming.
That looks good. So you jump in, too. Buy a house.
Then it doesn’t go up in value.
I'll give you an example.
Let's say 10 years ago, you were looking to buy a property in Auckland.
The median sale price was $830,000, and over the prior 10 years, Auckland house prices had been shooting up.
They’d gone up (on average) 7.5% a year over the prior decade.
So, you get on that bandwagon and say, "Let me invest too."
You buy the median house. You think that if your house goes up by 7.5% each year, you’ll make $880,656 over the next decade.
But you didn't.
Because house prices averaged just 1.9% over the next 10 years. So if your house followed the market, you made $171,890.
Still good. But $708,766 less than you thought.
And this is the mistake I see people make all the time.
They think that the returns they get over the next decade will be similar to those from the past decade.
Now, let’s say at that same time, you thought about investing in Invercargill.
10 years ago, it didn't look like Invercargill was going that well. House prices had only averaged 2.9% over the prior decade.
But you decide to buy anyway, and the median house price is $200,000.
If your house value just went up by 2.9% per year, by now it would be worth around $266,000.
But the annual return you actually got was 9.7%, and so your house would actually be worth $505,000.
So you made $239,000 more than you were expecting.
Looking at the returns over the past 10 years is a TERRIBLE way to forecast the return you’ll get over the next 10 years.
Because these numbers depend entirely on when you start and stop the clock.
If we think about Auckland, the 10-year return in 2016 looked awesome. That’s because that 10-year period ended at the top of a massive property boom.
If you look at today, the last 10-year returns look awful. That’s because the clock started at the end of a massive boom, and today we’re at the bottom of a massive downturn.
So the fact that Auckland house prices are underperforming vs the rest of the country doesn't mean it’ll keep underperforming.
The fact that Invercargill is overperforming doesn't mean it’ll keep overperforming.
It’s obvious once you look at the data.
Yet property investment coaches fall for this trap too.
One property coach (on Instagram) last week effectively said that if you want a house that goes up in value, stop looking at Auckland.
They used the last 10 years of returns as evidence.
But as you’ve now seen, the last 10 years of performance don’t indicate (at all) what the returns will be for the next decade.
Here's how you use this data yourself.
Because this data is difficult to calculate, I built you this calculator.
You choose your region and holding period, and you can see at any point if you decided to invest what the return was:
And what you'll see is that there is often a massive difference between the prior 10 years and the next 10 years.
And the point of this newsletter isn't to say “invest in Auckland”. Though it is one of my top areas to invest.
It's to give you evidence that previous returns really don't guarantee future returns.
And cherry-picking a decade of data is a bad way to pick a region to invest in.
The truth is that the best-performing property market changes over time.
Some areas will overperform for a time. Others will underperform. Then it switches around as different markets experience ‘catch-up’ growth.
So it's no use going online, and asking, "Where are house prices going up fastest right now?"
Because that's not going to give you a good sense of what might happen over the next 10 years.
Founder, 20+ Years' Experience Investing In Property, Author & Host
Andrew Nicol, Managing Director at Opes Partners, is a seasoned financial adviser and property investment expert with 20+ years of experience. With 40 investment properties, he hosts the Property Academy Podcast, co-authored 'Wealth Plan' with Ed Mcknight, and has helped 1,894 Kiwis achieve financial security through property investment.
This article is for your general information. It’s not financial advice. See here for details about our Financial Advice Provider Disclosure. So Opes isn’t telling you what to do with your own money.
We’ve made every effort to make sure the information is accurate. But we occasionally get the odd fact wrong. Make sure you do your own research or talk to a financial adviser before making any investment decisions.
You might like to use us or another financial adviser
