Keep your focus on the long-term

Posted 2 May '23

by Nick Gentle on
Article appears under: About Property Investment

Property investors are just as guilty of short-termism as stock market investors; we make 20-year investments… then closely follow the daily news cycle, weekly opinion pieces, monthly statistics, political opinions from all sides of the spectrum, and social media everything. We just can’t help ourselves, I guess.

To counter that, especially when the news mill is grim, we need to focus on the long-term trends that underpin why we invested in the first place. Understand that a large "macro" trend happens over time, even if it might not be obvious yet. 

This is precisely how economists think; they look at market forces in play and make predictions. They also cop a lot of flak in the media; it’s not enough to say you believe inflation will ease over time, you’re supposed to be able to predict where the OCR will be 4 months from next Tuesday. This is social-media-era reactiveness and we investors really do need to stop that nonsense.

"Yet" is a bit of a magic word that lets us make forward-looking assertions that don't line up with backward-looking statistics. “It’s coming, even if it hasn’t happened yet”, is a way to sit with long-term ideas and ignore the noise.

"This suburb will improve over time"
"This property has long-term development potential"
"This project will work out even if it takes time"
"Owning this in 30 years will set up my retirement"
"I'll avoid this area because of climate change risks"
"I'll invest in this area because of it's proximity to a university"
"My strategy works for me, even though it is not the most popular"

Here is an example of how I put together an opinion I've had for the last 2 years, which went against the short-term news and statistics. 

Predicting a rental shortage and rent increases in the long-term, while our borders were shut, and during a building boom.

When the government removed interest deductibility, on the back of taking away the 90-day no cause termination option from property owners, my first thought was about how much of a rental shortage this would lead to.

Actually no, my first thought was #)(%)(*&#%T!!! But you get the picture...

Our borders were still closed at this stage and our population was at best-case-scenario flat, so I didn’t know when this would happen, I just couldnt find any reason why over time it would not

My conclusion came from three opinions:

  • As investors sold for whatever reason, many of those properties would not remain as rentals 
  • Many investors who held would move shift away from standard tenancies
  • When people move to New Zealand they rent

Of course in the short-term I was wrong...
What happened next? Oops... the tax changes added kerosene and a match to a building boom, everybody decided become a developer all at once, and our borders were still closed with the population drifting down. 

But here's the trick, the magic word “yet” means your long-term belief does not need to be immediately true and obvious to everyone, every day, in the interim. There's no need to defend your opinions with people who haven't done the same research... this isn't social media :-)  

Since then three things have played out:

Supply decline in the existing property market. Many investors have sold OR moved their properties to social housing OR moved to Airbnb. Constrained by the CCCFA, fewer investors are able to buy. The pool of rentals is shrinking, especially in areas where building activity was minimal.

Future supply decline in the new build market. Cost increases, supply issues and project delays saw banks get nervous about construction. Interest rates rose and sales off the plans dropped - admittedly from record highs. Much of today’s building activity was sold a year or more ago. Similarly, what is being consented now would have been applied for a year ago, so developers and their banks are reevaluating the feasibility of projects in today's environment. Many will choose to wait, or not go ahead at all.

Population U-turn. As supply of both existing and new stock has declined, the demand for rentals has exploded. Why? After two+ years of pent-up demand, the floodgates have opened and a record numbers of people are coming into New Zealand.

Today's housing stock is what we will have for a while, more people are moving to New Zealand than ever before, and the availability of rentals as a percentage of housing stock is trending down. Combine that with higher costs for owners and the usual flow-on to rents from wage inflation, and everything points to significant rent increases over the coming 18 months

I thought this would be a major story by the election, but it seems to have broken early. If you can’t get a rental in a city that has seen as much building as Christchurch has, how is it going to play out for the rest of New Zealand?

Many news websites reported a high number of building consents and a one-time surplus of rentals in a couple of areas, averaged it as a lazy "overall demand for rentals" for all of New Zealand, and equally lazily predicted that would be status quo for the foreseeable future. Two minutes of forward-looking research would have shown that rental demand in most of New Zealand was still very high, sales off-the-plan were well down from the peak, and migration was starting to open up.

Conclusion: Today's opinions and short-term statistics often contradict or mask a long-term trend, especially when the timelines differ. Contrasting ideas can coexist and both be correct when you compare what happened last quarter vs what is coming 2 years from now.

Another one: Today's inflation is leading into the next increase in asset values

You can use this idea of “it will happen but maybe not yet” to avoid overreacting and talking yourself out of good long term decisions, or into bad ones.

Here’s another long-term idea that I am confident in.

Today’s inflation is going to trigger and amplify tomorrow’s housing boom. “Tomorrow” could mean 3 years in the future, but it will happen as sure as the sun follows the rain.

I won’t take as much time to explain this but again, this is underpinned by some key ideas...

  • Property is cheaper, while incomes and population have risen. Once we are through this transition, folks will find themselves with more money, competing with more buyers, chasing the same number of homes.
  • The eventual downturn will cause inflation to stabilize, and the markets predict interest rates to flatten and decline (evidence: it is already cheaper to borrow for 3 years than 1).

I don’t know when this will play out, my feeling is over 2-3 years, which is good because it gives me a window without market hype. I'm certainly not toing to go online and try to advocate for this.

I’m comfortable with the logical outcome of these long term market forces, and that means I can pay the same amount of attention to doom and gloom articles as I did to the recent euphoria of a rising market – zilch.

How else can we use the long-term view

You do it by default already. Just start to recognize when what you read in the media is either short-term focused or yesterday's news, so you know when your mind is being pulled into short-term reactive mode. 

I'll finish with an image that matches with just about every conversation I've had with long term investors over the last 15 years I've been in property... 

Keep calm and carry on, team.

Nick Gentle
Business Owner & Operations Manager
027 358 3855

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