The psychology of investing: house prices and fear mongering

Last weekend, The Australian newspaper published the blog I sent you last week where I predicted that the property market is close to the bottom and that prices next year would either be unchanged or improve slightly. Well, that article received over 60 comments and none of them were complimentary or supportive of my prediction. Upon reflection, I wanted to share some very important comments and observations.

Be aware of the story you are telling yourself

I am almost certain that 95% of the people that commented on my article have never invested in property and probably never will. They desperately want to prove that their decision to not invest was correct; “See, the market is about to crash. That’s why I didn’t invest!”. So, when there’s an opportunity for support the idea that investing in property is destined for failure, they jump at it.

Successful property investors tell themselves a story too. Most investors will say that the market will be fine in the long run so there’s nothing to worry about – it’s all just media hyperbole.

With this in mind, I would like to make two points:

Be careful that you don’t fool yourself

Once you understand that humans are susceptible to only seeing things (data, media, ideas, etc.) that validate the story we are telling ourselves, you must be careful to not be too one-eyed. One of my favourite sayings is “hold strong opinions, loosely”. Always leave room for the idea that your story could be wrong.

Be careful who you listen to

It is interesting to note that the economists that don’t invest in property themselves (personally) tend to always hold negative views about the property market. The ones that do invest in property tend to be more balanced. Also, negative property views make perfect clickbait and some commentators have built a career out of holding perpetual negative views – because it garnishes media attention. So, be careful who you listen to.

In short, people that voice very strong views tend to do so to defend (validate) past decisions.

The chorus is getting stronger for a loosening in credit policy

Even over the past week, the chorus of people that are saying that credit is too tight has been growing and getting louder. Business leaders, economists, RBA and media are all saying that it’s a threat to the wider economy, not just property. My view that credit will loosen in 2019 becomes firmer as the weeks pass.

Negative gearing might not even be banned if the ALP wins

Last week Bill Shorten said that he may delay the implementation of negative gearing until as late as mid-2020. This is the first time that Mr Shorten has hinted at a possible delay. Perhaps the ALP is slowly backing away from its policy especially in the face of a weaker property market.

The cash flow impact is totally offset by low interest rates

I make this point mostly as an interesting observation rather than trying to make a water-tight financial argument. It is interesting to note that the cash flow cost of a $650k investment property with no negative gearing at current interest rates is still less than when rates were 7% p.a. with negative gearing.


5% interest rates with no negative gearing

7% interest rates with negative gearing

Gross rental income



Property expenses



Interest cost



Pre-tax loss



Negative gearing benefit



After tax cost p.a.



Were people saying that investors would dry up when interest rates were over 7% in the early 2000’s? Was there as much hysteria about higher interest rates as there is about negative gearing?

Of course, at some point in the future, interest rates will increase, and, in this situation, negative gearing would be very valuable. However, a property investment won’t produce a negative cash flow forever – its normally only material in the first 5 to 8 years of ownership. After 8 or so years, a property typically will not produce a material negative cash flow. If interest rates are lower for a longer period of time, the banning of negative gearing will have less of an impact.

Focusing on tax laws promotes (incorrect) short term thinking

Tax laws don’t drive property markets. Supply and demand drives markets.

The Australian market is arguably neither in over or under-supply – we have enough houses. Demand however is growing. It is stimulated by overseas migration and interstate migration in Victoria and Queensland. It is this imbalance of supply and demand that will push prices up in the long run – particularly in locations close to the CDB as these are better serviced by infrastructure than outer suburbs. That is the difference between Australia and the rest of the world. Infrastructure in suburbs 30 kms from the CBD is greatly inferior to that in a suburb that is 8 kms from the CBD. The only thing that will solve the housing affordability issue is a massive infrastructure spend – so living further away from the CBD is less of an impediment.

However, the common argument is that if negative gearing is banned, the number of property buyers will significantly reduce. However, less than 9% of Australian taxpayers invest in property. That leaves over 91% of taxpayers – or would be property owners – totally unaffected by any changes to negative gearing. In addition, not all investors will be deterred by changes in tax laws.

Will banning negative gearing reduce demand for property? Yes, in the short run. But that demand will be quickly replaced by growing migration and people will naturally adjust their expectations to the new tax laws. In the long run, the laws of supply and demand will dwarf any impact that taxation has.

The best question is where will property prices be in 2028? Cheaper than today? More expensive? A lot more expensive? Focus on this – not what will happen in the next 2-3 years.

Stick to the fundamental laws of investing

This is the reason I wrote my third book, Investopoly. There’s always a lot of noise distracting investors. Instead of being influenced by the noise, it is best to stick to the sound fundamentals of investing.