Property Prices Never Go Down, or Do They?

By Jason Fittler

"The fact is, good quality shares in a Bear market are normally being sold way below their fair value. As an investor you need to apply the same principals to selling your shares in a Bear market as you would to selling your house in one. Hold and wait for the market to recover."

Why is it people feel safer investing in property then shares?

If you ask this question at a BBQ you will most likely get the same answer, property prices are more stable then shares, property is less volatile then shares, houses are safe, house price never go down. Some property people will concede that from time to time property prices will stay flat but never go down.

Is this true?

No! In fact property prices fall and stay down for long periods of time, if we go back and look at property prices over the past 400 years you can clearly see periods of time when property prices have fallen and stayed down for some considerable time.

To do this we have to look back at the oldest recorded information on property prices, this is the Amsterdam Herengracht Index which spans a period of time of 385 years. When you take a look at the price of property adjusted for inflation, the longest Bear market for property was 267 years from the early 1700s until the year 2000. This is how long it took for the property market to recover from the crash which bottomed in 18th century.

You disagree with me? Most people will because it is hard to accept that this stable investment called property could possible do this. We think this way because humans live a very short life when compared to investments; as such we tend to remember things which happened in our life or the generation before, but not much beyond this. In the 20th century the property market bottomed in the 1950s as such we never seen a real crash in the property market. Much the same as many of us had never seen a 53% drop in the share market. We have now!

But let’s take a look at a more recent example, in Japan property mania started in the mid 1980s, prices of houses tripled in value peaking in the early 1990s. It then spent the next 10 years in decline losing over 76% of the value from the early 1990s. America is now experiencing a property crash; we wonder how long this will go for.

What I would like to focus on however is what property investors do when property prices fall. In short “nothing”, think of it this way, you are looking to sell your house and upgrade. You think your house is worth $500,000 you speak to your realtor and they agree. You list, your house and open it for inspection. Your first offer is $400,000 so is the next and the next etc. In this situation most people simple do not sell their property because it is their belief that the property is worth more. So they unknowingly sit and wait until the market improves.

In the stock market we call this “riding out the market”. The above behaviour is exactly what you should do with any investment not just property. So why do people sell shares when they are down. It comes back to people beliefs; you see the price of NAB in the paper where the last price paid is clearly stated, so that is what is must be worth. If all the property in Australia traded in an environment the same as the share market where every buyer and sell can see all of the bids and offers, for every house on the market I suspect we would see much higher volatility in property prices. Vice versa for shares.

The point

The value we place on our shares is in the most part directly related to the information we have access to and our perception of the economic environment and very little to do with what the shares are actually worth. We sell them because we know straight away what people are prepared to pay for them.

The fact is, good quality shares in a Bear market are normally being sold way below their fair value.

As an investor you need to apply the same principals to selling your shares in a Bear market as you would to selling your house in one.

Hold and wait for the market to recover.