The theory of valuation has evolved over many centuries and incorporates not only the dynamics of the market in which it operates but also the economic, cultural and social aspects of the society that utilises it. Consequently it can be regarded as still constantly evolving; never fully set in concrete. – Australian Property Institute
Perhaps the most important question an investor has to ask themselves is what it is that actually determines and builds value. Material (financial) value is actually quite simple to broadly define: It is the price somebody is willing to pay for something. Since the building on a property declines in value over time like a car (a depreciating asset) for taxation purposes, the growth in property value is perceived by many to be the land, a finite resource with limited supply (until we figure out how to live on other planets).
The problem with this thought is that since apartments share a smaller portion of land, then they have far less opportunity to maintain and grow in value, right? Obviously not.
A recent report from RPData illustrated the following:
– In Sydney, apartments have had a higher ten year growth rate, less time on market and higher gross rental yields than houses.
– In Brisbane, apartments have had a higher growth rate over every recorded period up to ten years, less time on market and a lower ‘vendor discount’ figure than houses.
In Perth, house and apartment value growth are pretty close over all periods, except that there has been an 8.4 per cent growth in apartment values in the last 12 months against the 2.6 per cent growth in house values. What this means is that Australia (and the world) is very different to what it was when this point was a little closer to being true, so how can we break this down?
1. Demographics have changed and continue to change. Some examples include delayed marriage, smaller families, higher divorce rates, massive growth of irreligion and employment industry shifts.
2. As the demographics shift, culture as a function of demographics has also shifted. Gone are the nine-to-five workdays, the bangers and mash dinner, the quarter acre block down from the church in the suburbs as far from the train station as possible.
3. The culture, or ‘zeitgeist’, stimulates certain behaviours. Behaviours are stimulated by emotion. Emotion and behaviour are the foundations of ‘demand’.
4. Demand has then shifted. People now ask for cabernet merlot instead of red wine, a chai latte instead of a white coffee, and a specific type of home that caters to their wants and needs rather than a home that will suffice to raise the future family.
As exponential cultural changes occur, relying on an investment style based on old wives’ tales will lead to poor decision making and unsatisfactory performance. Don’t follow the herd mentality.
Successful investing relies on staying one step ahead of the herd rather than reacting to the herd, and we know that the majority of a herd doesn’t actually know what it is doing, rather it is just following because it seems like the right thing to do. It isn’t.
Posted by Luke Graham