Value Growth Isn’t a Linear Process

Thursday, December 17, 2015 / Property Investment

When people think about the value of their investment increasing, they have a line similar to this in mind:

This is not however the natural way in which an investment will appreciate in value.

Don’t get me wrong, when you balance out consistent growth over a few decades, it does become possible to draw a straight line, from the beginning to the end, such as this chart of Australian Housing prices for a 26 year period.

 

As we can see, the black line of linear growth for a 26 year period does not match the actual growth line very well at all.

True growth does not occur in a straight line, as there are always many other factors that come into play.

It can be daunting when you have an investment property and see that for the last quarter there has been 0% or even a negative growth, however you must always remember that a long term property investment strategy is not built upon a quarterly growth expectation!

For instance, if you had just purchased an investment property in 2004, you would have seen the national house price fall gradually for two years before the averages actually made it back to the same point in which you purchased your property.

If your expectation was that you would buy the investment, and then sell it within one to three years, then you would have come unstuck. However, if you were looking for a ten year at minimum commitment, then the property bought in 2004 would have grown significantly over a ten year period.

Values Ebb and Flow Like a Tide or Current

Prices will go up in some quarters, down in others; they never grow at a steady and consistent rate.

Your mind (if it is similar to many people’s) naturally wants to think in a straight line, however this type of thinking can lead to undue stress.

If you watch the monthly updates and reports on property values, then you will be going through an emotional roller coaster, with some months feeling like you are gaining traction and other making you feel as though you are losing too much ground.

The problem arises from watching the price fluctuations too close.

When you see them occurring in ‘real time’, it can cloud your vision from the longer term value changes that are to be expected.

If you bought your property, and then promptly forgot about it for ten years, never checking in on the growth, then when you came back to view the level of growth you would be satisfied and happy. However, if you watched the price bob up and down for the whole ten years, it would be more akin to an emotional roller coaster.

A solid property investment strategy is built upon a firm understanding and awareness of a given period of time, and is not swayed by short term set backs and reactionary price dips (or increases). There is absolutely no reason to let a poor performing quarter, or an analysts predictions for the next 12 months cause you undue stress about our long term real estate holdings!