WARNING: Property market is turning (Can’t wait!)

Some headwinds suggest the property market is turning – which is always a great time to buy.

My motto: property investors need to ride the ups and the downs.

Think about that for a sec. You need to ride the ups and the downs. I’m not saying property investors need to get in when the gettings good, and get out when the gettings not so good.

You need to ride the ups and downs.

Timing the market is incredibly hard, and probably impossible over the longer run. You might pick one peak or trough if you get lucky, but over a 30 year career, how many are you going to hit?

And so you can’t build a career (and a decent portfolio) by timing the market. It helps to know where we’re heading, but it’s not enough to build real wealth on.

So we need strategies that are flexible and work with us through the cycle – help us ride the ups AND the downs.

It’s like back in 2004/2005, Sydney prices were falling and everyone was talking about the coming bust. But I didn’t buy it. The changes to negative gearing and the capital gains tax concessions were still coming into full effect, and the rest of the country was doing well.

And so I made some pretty decent money then.

But then the GFC came, things looked pretty rocky. I personally didn’t think the mining boom would insulate us quite as well as it did. I was wrong. But I still made money.

And if I’m honest, I didn’t quite see house prices booming as much as they did in the years since 2012. The mining boom was transitioning, but nobody saw quite how much money was coming out of China. I knew things would be strong, but in the end it’s been an incredible couple of years.

I was wrong again. But I still made money.

And the reason for that is “the market” only has a small impact on my strategy. It’s important, sure, but I don’t like to let my fortune ride on things I can’t control.

Amateur investors see property investing as riding a roller-coaster. The secret to success in this model is to get in at the bottom and out at the top.

Same story with amateur stock investors.

It definitely is possible to make money with this strategy. But it is also definitely possible to lose money with this strategy as well. If you get the timing wrong and get in at the top, you get wiped out.

So success hinges on timing. But timing is impossible. So success hinges on something you can neither predict nor control.

This is the definition of gambling.

I’ve worked too hard for my money to gamble it away.

And in many ways it can be harder to find the deals I like when the boom is going full-bore. Things get a little wild. There’s a lot of roller-coaster riders in the market. Their eye’s light up with a couple of years of strong growth, and they end up wading into the market and paying more than a property’s worth.

But often they get lucky. The gamble pays off.

After a year or two, the market overtakes them and they never realise their mistake. After 5 years the market keeps rising and they’re in the money. They tell themselves they bought well. After 10 years they make a heap of money and they start running seminars on how to be a roller-coaster rider.

After 20+ years without recession, after consistently strong price gains in property, the Australian market is full of roller-coaster riders.

And so for the past year or so, I’ve been less active in the market, and have been focusing on working my existing properties harder. I’ve had a few town-house developments on the go and things like that.

But I think we’re possibly approaching a tipping point.

My sense (and I’ll be honest, it’s as much an art as it is a science) is that the balance of the market has shifted.

Within the property market itself, a number of headwinds have emerged.

The APRA credit restrictions are having an effect. The investment bank Morgan Stanley estimates that with the increase in investor mortgage rates, changes to rent and income weightings, and the blackballing of certain investor segments all taken together, the effective interest rates facing investors have risen 100-120 basis points in the last few months.

That’s the equivalent of 4 or 5 official RBA rate hikes.

Given how important investors have been in recent years, this is a significant shift.

At the same time, mortgage rates for owner-occupiers have also started tilting upwards. Westpac has raised rates to sure up their books, and I’d expect the other banks to follow suit.

At the same time, Chinese money is coming off the boil. The Australian government is much more serious about making sure that Chinese money is playing by the rules, and China itself is also keen to stem an outflow of capital as their equity markets get the jitters.

And all this is happening within an economy that is struggling to find its purpose after the mining boom. The production phase is much less labour intensive than the construction phase, but it also seems there has been major over-investment in some commodity sectors.

Housing construction has taken up some of the slack, but mining has left some very big shoes to fill.

I expect we’ll see house price growth slow over the next 6 months, and a softer tone to the auction clearance rate data is perhaps a foreshadowing of that.

If you’re a roller coaster investor, time to hit the eject button. 2016 is not going to be a year of easy money.

But if you’re a serious investor stick with me. My bet is that we’ll find more room to move in the market next year. If we’re lucky, we might also see some panic selling – which can be a fantastic time to buy.

Now is a time to take stock and consolidate your preferred strategies.

The herd is getting restless.

Where are buying opportunities opening up in your view?