The dangers of analysing past performance

Even though investors are constantly told not to use the past performance of an investment to gauge its future success, more than half of property investors violate this golden rule, according to a new survey by ME Bank.

Fifty-six percent of property investors said “Australian house prices have always gone up in the past” when asked for the main reason for their confidence. Eleven percent of respondents said that since “so many other people are buying investment properties,” it must be safe.

Only 34% of the survey’s 1,500 respondents cited “advice or analysis” as the main reason for their confidence.

There is some concrete basis for people’s confidence. Australia’s housing boom saw 55 years of unprecedented growth, with home values soaring by more than 6,500%. However, after house prices fell in Sydney for the second month in a row, economists from UBS said the country’s world record housing boom was on its last legs.

Patrick Nolan, head of home loans for ME Bank, said the survey’s results are a timely reminder for the need for caution and objectivity when it comes to property investing, especially with property prices reaching such unsustainable levels.

When buying an investment property, buyers should consider a broad range of factors that could impact its future value.

“Australia’s property market is diverse and not all properties are performing equally at any one time,” Nolan said. “While Perth is currently recovering from a downturn, Melbourne and Sydney are growing, albeit not as fast, while growth in Hobart has improved.

Apartment development in Brisbane, Sydney and Melbourne are also at record high levels, with some commentators speculating supply may outstrip demand in the short-term.

“Your investment timeline is another important factor: the longer you’re able and prepared to remain invested the more likely you are to see growth.”

Other factors to consider include population growth, surrounding infrastructure, and employment prospects. These can influence an investment property’s income stream as well as its long-term value.

“In the end, analysis and advice is the best basis for making any investment decision, particularly if you’re tempted to rely on past performance, or indeed if you are basing your decision on what other investors are doing,” Nolan said.