2022 predictions and planning: Part 1

It is stating the obvious to say that goal setting is important.

The fact is, if you aim at nothing, often that is exactly what you will achieve; nothing!

Each year my wife and I set personal, relationship, business, and financial goals.

We almost always achieve all the goals we set for ourselves each year.

I want to share the process which we’ve just completed and share what I think 2022 might bring us ‘investment-opportunity-wise’, as this will help you set realistic goals.

Part 1: Investment risks and opportunities that 2022 might bring

On one hand, you should never let markets dictate your investment strategy or decisions.

Market sentiment almost always reflected short-term fears and greed – neither of which are of any use when making long-term financial decisions.

However, understanding markets is helpful in prioritising which goals are most important to implement in the next 12 months.

For example, if you plan to invest in shares and property, but feel shares are wildly over-valued, then you could conclude to invest in property in 2022 and reconsider shares in 2023.

Therefore, I think it is useful to consider what opportunities and risks markets might present during 2022.

Australian property market in 2022

The challenge with forming a view on the property market is that the past 12 months have been influenced by very slow supply i.e. fewer investment grade houses for sale.

As such, some buyers have been driven by FOMO and have been prepared to overpay for the property just to “get into the market”.

Listings in Brisbane are about one-third below their usual volume and stock levels in Melbourne and Sydney are also lower, although certainly not to the same extent as Brisbane.

Listing numbers in regional locations, particularly beach-side locations, are also chronically low.

If supply remains tight i.e. there are fewer properties than there are buyers, property prices will continue to appreciate, albeit at a slower rate than in 2021.

Supply will eventually increase because higher prices encourage more sellers to come to market.

However, I don’t think that will happen until the Covid risk disappears.

Of course, no one knows when that will happen!

Price becomes more important the further you move down the quality scale

For the sake of this example, let’s assume that Covid evaporates over the course of 2022 and that 2023 brings us a normalised property market i.e. supply returns to normal levels.

It is very possible that we may see prices pull back by 5-10%.

That’s because there is no longer any pressure to overpay to buy a property.

For example, properties that were selling for $1.2-1.3m range may sell for $1.1-1.2m range, which may fairly represent their intrinsic value.

If this happens, people that overpaid for property in 2021 might find themselves in a paper-loss position for a short period of time.

In short, the consequence of overpaying could be that you accumulate very little equity in your property over the first few (2-4) years of ownership.

If you plan to buy a property (e.g. a home) in a non-investment-grade location, then it is increasingly important to not overpay for the property.

The further down the quality scale you move, the more the price/value assessment becomes.

That’s because high-quality, investment-grade locations tend to benefit from strong price appreciation, and this strong growth quickly makes up for the financial impact of overpaying.

However, in lower growth locations, the consequence of overpaying can sting for many years.

I must highlight that when buying an investment-grade property, the quality of the property is vastly more important than the price you pay, as discussed here.

Overpaying slightly for the right property is not concerning.

In short, I think 2022 will continue to be characterised by below-average supply which will drive prices.

If your goal is to buy property in 2022, my advice is to be diligent and patient.

That is, definitely pursue that goal but also make friends with the possibility that if you cannot find the right property for the right price, you may not complete this goal in 2022.

Share market risks and opportunities

I think growth stocks are the biggest risk in the share market at the moment, but it is impossible to forecast how that might payout over the course of 2022.

You would need to adopt implausible assumptions to justify the value of some growth stocks.

Many of these growth stocks are unprofitable, burn through cash, and have never paid a dividend – yet they are valued at multiples of hundreds of billions of dollars (or one trillion in Tesla’s case).

At some point, the market will no longer support these valuations, and growth stock share prices will correct.

This could happen dramatically (e.g. stock market crash) or gradually.

It is impossible to predict when this will happen and what the impetus will be.

Also, it is important to keep in mind that higher inflation will have a negative impact on the value of growth stocks (because higher inflation leads to higher interest rates which result in a higher cost of capital and consequently lower valuations).

It’s worth noting that there is a risk that higher inflation will persist for longer than expected.

My approach towards investing in the share market during 2022 will be to avoid over-priced growth stocks.

I will also tilt towards geographical markets and sub-asset classes that exhibit the best medium-term return prospects.

In short, my investment decisions will be guided by what I think will maximise returns in the medium term and I won’t be concerned by what might occur in the short term i.e. throughout 2022.

Commercial property market

The commercial property market is still very healthy, even the office market, which you might find counter-intuitive given the impact of Covid and WFH.

Investors are willing to buy commercial assets on low yields (meaning they will pay a higher price for a property to secure its rental income stream).

This is probably driven by low interest rates i.e. term deposits are paying very little interest, so investors are looking for alternatives.

You might assume that investors buying a $50 million commercial building would be well-informed, diligent, and savvy investors, but that’s not always the case.

I expect the commercial property market will continue to perform well during 2022 driven by low rates.

However, when interest rates eventually do rise, investors that have either over-paid or invested in sub-investment-grade assets could suffer losses.

Therefore, when investing in this sector, it’s critical to invest in the right property for the right price.

I will release a two-part blog about investing in commercial property in early February.

Interest rates

Inflation is creating upwards pressure on interest rates, particularly in the US.

I don’t think there is much doubt that supply chain disruptions are contributing substantially towards inflation.

What is less certain is how long it will take to fix supply chains and to what extent it dampens inflation.

Unlike in the US, we haven’t seen any substantial wage inflation in Australia.

The reopening of international borders (which opens the door to international students and foreign workers) will hopefully address workforce shortages, particularly in hospitality, and reduce the likelihood of wage inflation pressures.

In short, I don’t expect variable interest rates will change during 2022.

However, I would not be surprised if fixed rates rose during 2022, as they reflect future interest rate expectations.

Omicron and the economy

It has been well publicised that the omicron outbreak has produced lockdown-like economic consequences, including less travel and lower than normal retail spending.

Whilst this will have an impact on GDP in the first quarter, if this current omicron wave abates in the second half of January, as expected, it is likely that economic activity will rebound and recover quickly.

Use this information to set personal goals

Next week, I will share the goal-setting process that my wife and I recently followed to set our financial, personal, relationship, and business goals for 2022.

We use the above market expectations for 2022 to ensure that our goal setting was realistic.