My professional life has been all about “the numbers” for more than two decades! So, as an accountant and financial advisor, it pains me to say that numbers are not always right!
Numbers are factual, verifiable, logical and the ‘robustness’ gives me a lot of confidence. However, when it comes to investing in property, a focus on numbers alone can cause very costly mistakes.
Evidenced-based approaches are rooted in simple math
I am a strong believer in only employing evidenced-based investment methodologies. That is, only invest when there is overwhelming evidence that the methodology will generate the investment returns you desire. If there is no evidence, then it is too risky. You may as well throw darts at a dartboard.
Of course, normally we look to math to verify the evidence. Therefore, I appreciate that me stating that numbers can’t always be trusted may be somewhat contradictory.
Why can the numbers be wrong?
It is very important to understand what has driven the data, because not all data is reliable or meaningful.
Suburb median data is a good example of this point. Sometimes I see advisors or journalists reporting median house price growth in a given suburb, often to support an investment case. But it’s important to understand the data before drawing any conclusions.
Was the volume (number) of sales statistically significant? Were the properties that sold during the period representative of the property type you are considering investing in? Were the results driven by a once-off change such as the release of more land, major developments or the gentrification of the suburb?
Just because a suburb has generated price growth of 9% p.a. over the past 5 or 10 years, doesn’t necessarily suggest its future growth will be in line with this.
Property specific data
Property specific historical data can also sometimes be unreliable.
It is important to ascertain whether past sales were representative of the true market value of the subject property. Situations such as sales between related parties, transactions in very buoyant markets (i.e. if purchaser overpaid), if any capital improvements were made to the property during the period and so on. These can all affect the implied capital growth rate.
Not every sale perfectly reflects a property’s intrinsic value, so care must be taken.
Data can over or under inflate historic growth rates
Data might suggest that a particular suburb or geographical location is primed for future growth, but if the data is wrong or unreliable, you could make a very costly investment mistake.
Similarly, individual property growth data might suggest a property is a good or bad investment, but the reality might be different. You must understand the story behind the numbers.
And this is where the art comes in…
You should never make important property decisions on data alone. The data only gets you part of the way. You must compliment that data with local area knowledge and expertise.
Having many years of experience in a geographical market allows you to understand a market better and appreciate any changes in value drivers. This is where the “art of property” plays an important role. It gives context to the data and allows you to decide on its relevance.
Paying for someone else’s experience
According to the
Guardian, psychologist Dan Ariely (sidebar: he has given some interesting and entertaining
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