Most days I take our dog Lincoln for a walk along the beach at the end of our street.
This morning as we walked along the path I looked out at the water on the bay and saw strong waves thrashing onto the shore and thought to myself, “Wow, it’s windy out there.”
As I walked further along, I turned the bend and a wall of wind hit me in the face and I thought “Boy, it’s windy here!”
Then I realised – it had actually been windy all along.
When the wind was behind me it in fact was helping me.
I realised the tailwind was a force that I hardly noticed but made my walk easier, but when the same wind was in my face… well that was different!
When it was a headwind, it was a real hindrance.
Tom Gilovich, a psychologist at Cornell University, wrote:
“What’s true of headwinds and tailwinds is more broadly true of most of the benefits we receive and the obstacles we must overcome in many areas of life.
“Like headwinds, obstacles are “in our face,” reminding us of their existence, because we have to attend to them in order to overcome them.
“Many of our benefits and privileges, in contrast, are easy to lose sight of because we typically don’t have to attend to them, we just profit from them..”
Tailwinds and headwinds in property
When you look back at our real estate markets over the last year or two, almost all property owners benefited from a strong tailwind.
Even so, many beginning investors complained about the “headwinds” they were facing.
You know… a shortage of good properties, strong competition, difficulty getting loans.
You almost never hear them say they’re grateful for the tailwinds that drove the market.
But a problem will soon arise for many new property investors, those who took advantage of the current property boom.
You see…they don’t realise that they’ve been investing with the assistance of a tailwind that has caused almost all properties to increase in value at a rate we haven’t seen for many decades and that we are unlikely to see again for a long, long time.
Without the perspective that more experienced investors have gained by living through a number of economic and property cycles, it will be hard for this new generation of property investors to realise that they might just have been lucky.
That their investing success might really not have been the result of their smart decisions, but because of the tailwind of our property markets.
But…one of these days, this will shift into a headwind.
Like all property cycles, this cycle will end; and when that happens housing values will remain flat for a while, probably a number of years, and in many locations, real estate values will fall.
Of course, “A” grade homes and investment-grade properties are likely to hold their values well, but secondary properties are likely to drop in value as happens in the slump phase of every cycle.
Think about it…
The value of many properties will increase by over 20% during this cycle and well-located properties will increase in value even more than that.
However, wages growth will have only increased a few percent, meaning properties will become unaffordable for many people.
The result is that at the end of this cycle we will have a two-tiered property market.
The wealthy – high-income earners, knowledge workers, and those with multiple sources of income – will still be able to afford these more expensive properties.
There will always be wealthy people who will be able to and prepared to pay to live in the right properties in top locations.
But many potential homebuyers and tenants will face headwinds as their wages will not have increased sufficiently to enable them to afford to pay more for their accommodation.
And some property investors who bought in the wrong location because they compromised just to get into the property market will face headwinds as their properties will languish for a number of years.
Enjoy the tailwind while they last.
But be prepared for the headwinds that will surely come.
You do this by having a financial “rainy day buffer” to see you through the difficult times and by owning the right type of assets – ones that will be in continuous strong demand by both owner-occupiers and tenants when the wind changes.
There will be a two-speed property market ahead – don’t be left owning the wrong type of property!