Is it time to sell your investment?

Anyone who professes to know the exact top or bottom of a market cycle is speculating at best and lying at worst. All markets are prone to run on emotion in the short term, overreacting both positively and negatively to economic indicators and government stimulation and restraint. But ultimately, all markets, including Australia’s real estate market, are governed by economic fundamentals.

While our current real estate market may have some more price growth left in it, according to many experts who study the relevant economic indicators, we are now entering into a ‘fully priced to overpriced’ phase. This suggests that a market correction may occur in the not too distant future.

A ‘correction’ of 5 per cent to 10 per cent though, should not be confused with a ‘crash’ (a 10 per cent to 20 per cent drop) which many people are happy to claim is on the way. Since the 2007/2008 Global Financial Crisis (GFC) the boom in doomsayers trying to predict the next big crash is enough to put you asleep and/or build complacency.  But be warned; there is a big difference between market fundamentals suggesting that a correction is due and a spruiker who is selling seminar tickets because he claims to know when the next big crash is coming.

BIS Shrapnel Report
BIS Shrapnel recently released a report that became a headline story for several days. Angie Zigomanis, their senior manager of residential property warned that the wave of new developments in Australia over the next few years is likely to result in supply exceeding demand. Their research suggests that 5,800 apartments are currently due for completion in Sydney, with almost as many again planned to be built over the next few years.

Zigomanis claimed, ‘the level of apartment construction is now approaching a level that’s too high and unsustainable’.

This oversupply of apartments has the potential to drag down the rental market, which would in turn, impact on investor sentiment and create a knock down effect across the market. If such a scenario were to coincide with the Reserve Bank of Australia (RBA) raising interest rates in 2015 and 2016, the current positive outlook for housing could change very quickly.

Baby Boomers
Due to their love affair with negative gearing, many baby boomers own investment properties. Unlike shares over the last few years, property investment has delivered to these baby boomers both capital growth and portfolio stability. They say that ‘when you are on a good thing, (you should) stick to it!’ But should these baby boomers continue to hold or sell their investment property given the somewhat tenuous outlook? The answer is a difficult one, but one which differs from one’s circumstances to another.

There are an increasing number of baby boomers looking at the current prices on offer and deciding that now is the time to liquidate their investment property. Similarly, some have even amended their original plan to sell their primary residence sometime in the future, to selling it now, in order to cash in on the current real estate boom.

This sell down in baby boomer real estate holdings throughout Australia is only just beginning. It will be interesting to watch how the market absorbs this movement of assets over the next few years.

Investment Portfolio
The GFC wreaked a terrible toll on baby boomer’s superannuation and general investment holdings. The story could hardly have been more devastating for hundreds of thousands of boomers who had prudently built up their superannuation portfolios over the past two decades. Just as retirement seemed to be on the horizon, along came the most devastating global recession (and stock market crash) since the Great Depression of 1929. Unfortunately, many boomers panicked at the height of the GFC and sold out of the share market, locking in their losses. Others who held on for the long haul have still not gotten back to break even yet, even some six years later.

The ASX All Ords index peaked at 6873.02 in November 2007 and currently sits at 5629.27 (as at 1 September 2014), which is still 18 per cent below the peak 2007 level.

One Exception
One investment though has performed very well for baby boomers and that is residential real estate. As interest rates plummeted over the last few years and eastern state capital city population surged, this combined to cause a housing shortage. As a consequence, some house prices in these areas increased by up to 20 per cent to 30 per cent on their pre-GFC highs. Globally speaking, this is an extraordinary result. Most countries are still aiming to claw back the losses they experienced in their respective housing markets, while Australian house prices (particularly in Sydney and Melbourne) are still hitting new highs.

To Sell or Not to Sell?
For buy and hold property investors who have a decade or two of working years ahead of them, a house price correction of 5 per cent to 10 per cent is nothing much to worry about. Markets go up and markets go down. Ultimately, with patience and time, you will come out on top.

But for baby boomers looking to enjoy the benefits of retirement and financial security now, a correction of 5 per cent to 10 per cent in the real estate market would be terrible. It may see them having to work longer than necessary and miss out on some of their best years of retirement.

Suggesting to a baby boomer that they should consider selling the investment which saw them through the GFC is no mean feat. Any decision to do so should be considered and carefully planned. But it should be considered. After all, the investor’s maxim says to ‘sell in boom’?