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In this week’s episode, Dave, Cate and Pete take you through:

  • What is contrarian investing? Contrarian investing is an investment style in which investors purposefully go against prevailing market trends by selling when others are buying, and buying when most investors are selling. Contrarians may be seen as courageous, unconventional, counterintuitive thinkers, able to withstand herding pressures from crowd-following conformists. As Warren Buffet has said “”Be fearful when others are greedy, and greedy when others are fearful.” Contrarian investing is often discussed within share trading circles, but it is entirely relevant in property too.
  • Real examples of contrarian investing in property. The Property Buyer talks through her own personal experience of purchasing property during the GFC, when buying conditions changed dramatically and many were fearful. Also more recently, a client who purchased four properties at the beginning of covid, who saw the opportunity, while others put their purchasing plans on hold.
  • What would happen if you purchased half-way through a market fall? The Property Planner shares his research on how your assets would have performed if you purchased shares mid-way through the GFC and 2020 covid crash and purchased property during the APRA driven downturn in 2018. When a market is falling, it can be one of the best times to buy. But it is scary, due to the uncertainty of how far the market will drop or how long the decline will last before it swings back up.
  • Property market downturns. Check out our show notes to see a graph of the last few decades of downturns. The downturns look like blips in the long run. When the market declines, the magnitude is not as great and the length not as long as when the market is on the rise. The most recent downturn lasted 18 months, which felt like a long time when you’re living it, but in the scheme of our lives, is not very long. See the charts below to see the depth and length of downturns vs property price increases.
  • Segmenting markets – contrarian investing is not just about market timing. Whilst buying when others are fearful of buying is an obviously contrarian approach, there are also other strategies within contrarian investing. This could mean purchasing a less popular dwelling type, (such as an inner-city apartment), selling a property in a coastal or holiday hot spot or purchasing in a less popular area. The Property Buyer shares her tips on purchasing an inner-city apartment, which she just assisted some clients with.
  • The risks of being a contrarian. Going against market sentiment does carry great risk and simply going against the grain without doing the research and understanding the market will not necessarily yield you good results. The dangers of contrarian investing, if you get it wrong, is difficulty in selling if you’ve chosen an unpopular property or extended days on market when it’s time to sell. We also can’t underestimate the opportunity cost of investing in an underperforming asset versus putting your money in a well-performing asset instead.
  • Considering commercial property. With the onset of covid, commercial property has taken a hit and could present an opportunity to catch the market while it’s falling.

Resources

Show notes

  • What Is a Contrarian?
  • Contrarian investing is an investment style in which investors purposefully go against prevailing market trends by selling when others are buying, and buying when most investors are selling. 
  • Contrarian investors believe that people who say the market is going up do so only when they are fully invested and have no further purchasing power.  
  • At this point, the market is at a peak. So, when people predict a downturn, they have already sold out, and the market can only go up at this point. 
  • Contrarians may be seen as courageous, unconventional, counterintuitive thinkers, able to withstand herding pressures and even abuse from crowd-following conformists. 
  • Contrarian investing is often discussed within share trading circles, but it is entirely relevant in property too. 
  • We know plenty of contrarian investors, it takes a bold and brave person to be a contrarian. 
  • Just being a contrarian, without having a plan and a basis for your actions, can be hazardous.  
  • Examples of contrarian investing
  • Clients who purchased 4 properties at the beginning of covid, he had a plan and he had the capacity to do it. He works in risk and understood what he was doing. Long-term he’d do ok, short-term he’s done well as well.  
  • When covid hit we had a lot of clients go on pause, it’s not for everyone, but when you get it right, it can pay off.  
  • In 2020 – buy when everyone is scared of buying.  
  • The contrarian position now is to sell when people are scared of selling. Commercial property and regional markets are looking up, so now could be a time to tell.  
  • GFC lending got tough and lenders pulled out, restricted LVR, buying conditions changed. Making the decision to sell his property, because he thought things would get really dire. But this didn’t happen in Australia. He was getting agitated and wanted to sell in December 2008, contrarian, bought the property and bought a few others. $310,000 on the beach in Aspendale 
  • What happens if you purchase when markets are falling?
  • Lots of people are fearful and they’re worried about buying when a market drops.  
  • What happens if you purchase half way through a drop 
    • Latest drop – S&P 500 
    • Share Market started dropping 14 Feb 2020 – where it was sitting at 3,327 points 
    • Bottomed out 20 March 2020 – at 2,304 points 
    • 1 year later on 19 March 2021 – the market has risen to 3,943 points 
    • As of 15 Nov 2021 – is at 4,682 
    • If you purchased half way down the drop – at 2,815 points – your shares would have increased by 40% a year later in March 2021 and 65% today 
    • GFC – S&P 
    • Pre GFC, the share Market started dropping May 2008 – where it was sitting at 1,425 points 
    • Bottomed out Feb 2009 – at 735 points 
    • 1 year later on Feb 2010 – the market has risen to 1,104 points 
    • As of Feb 2011 – is at 1,343 
    • If you purchased half way down the drop – at 1,080 points – your shares would have increased by 3% a year later in and 25% over two years.  
    • Latest drop – Weighted Ave 8 capital cities residential property index (ABS) 
    • June 2017 – high of 146.5 points 
    • June 2019 – bottomed at 134.8 points 
    • One year later June 2020 – up at 143.2 points 
    • A further year on June 2021 – up at 167.2 points 
    • If you purchased half way down the drop – at 140.65 points – your property would have increased by just over 1% a year later in and almost 20% two years later. 
    • When a market is falling, it can be one of the best times to buy.  
  • But it’s scary – you don’t know how further it will fall or how long it will go for.  
  • There is a lot of merit looking at the time of downturns and how far they drop.  
  • The downturns look like blips in the long-term.  
  • The most recent one went for 18 months, which felt like a long time, but in the scheme of our lives, it’s not very long.  
  • When the property market goes down, the magnitude is not that big and the length is not that long, compared to when the market goes up.  
  • You can’t tell when it’s the bottom of the market, but you can tell when it has changed and has swung around.  
  • What were the hallmarks of the buyer’s market in 2008 with the onset of the GFC?
  • Heavy discounting 
  • Saw an inability to settle things – buyers not being able to borrow, it was an ugly time.  
  • You see the types people struggling to borrow, we were in a position to borrow and from a borrowing capacity, we were able to service the debt.  
  • In these conditions, the opportunity was enormous.  
  • State and federal governments reacted and reduced interest rates and there was a lot of stimulus and grants. We believed that would underpin property price growth and it did. 
  • Segmenting the market
  • Not just about market timing, ie: buying in a buyer’s market, selling in a seller’s market 
  • Buying a less popular dwelling type, ie. Apartment in the CBD, vacancies have dropped. Not many bells and whistles that make the cost of running high (concierge). Safe fire proof cladding. Any other issues with the building that need to be remedied – no special levies in place or on the agenda. Floor plan, layout, orientation, size, position of car space, storage.  
  • Buying at a price point 
  • Buying in a less popular area. Eg. Geelong after the Ford plant closure 
  • Holiday markets 
  • What contrarian opportunities exist in our current market?
  • Selling a coastal/holiday home – holiday hot spots 
  • Buying an inner-city apartment 
  • Buying a well-located, boutique apartment (*parity between houses and units is particularly interesting). 
  • What happens if a contrarian investor gets it wrong?
  • Difficult re-sale – loss on the property, or a long time to sell.  
  • Lost opportunity – if you put your money into something that was performing instead, you’d be sad about that.  
  • Consider commercial property
  • Many sectors are not doing well at the moment – reconfigure for co-working or CBD 
  • “Be fearful when others are greedy, and greedy when others are fearful,” said Warren Buffett, a phrase that encapsulates the contrarian philosophy. 

Gold Nuggets

Peter Koulizos – The Property Professor’s Golden nugget: consider the three R’s – risk, reward and research. It’s more risky to be a contrarian, the rewards are greater, but if you do your research you can mitigate the risk.

Cate Bakos – The Property Buyer’s Golden nugget: for those who wish they could be contrarian investors, but can’t, we’d all like to buy a lemon and have it turn out well. If you want to buy a good quality property, you need to prepare to fight for it. Competition may mean that you’re not going to buy a bargain, but if you’re going for something with mainstream appeal and long–term gain, that will support capital growth going forward. Don’t avoid a popular property when everyone is saying that it’s a popular product and you’ll have to pay a premium. Mainstream heard long-term can pay off as well.

Market update

  • Expected end of year activity. If you’re committed to purchasing a property, now is not the time to take your foot off the pedal. There is a distinct determination of buyers, vendors and agents to get deals done prior to Christmas and with other buyers getting distracted with Christmas preparations and other plans, now may be an opportune time to purchase. Unlike last year, where many agents worked through January after the desperation caused by lockdowns, agents want to take a break and are motivated to wrap up sales before the holidays.
  • Melbournians and Sydneysiders are moving back to the CBD. Today’s episode is about the contrarian approach to investing and one potential opportunity, (although the horse may have bolted) is purchasing a quality unit in the inner-ring or CBD that has unique attributes to provide long-term growth. Rental stock on the market for apartments in inner Melbourne have plummeted by 76% since February and this same count is down 56% in inner Sydney, showing that buyer demand for city units is now starting to pick up.
  • How COVID has impacted overseas property markets. The Property Professor outlines the striking similarities between Portuguese and Australian property markets and the impact that covid has had in relation to commercial and residential property.

 

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