Investment Research Group
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Among the most powerful lessons that come with experience is that things do not always stay the same. Good times and bad times come and go. Interest rates, exchange rates, inflation, economic growth; they go up at some times and down at others.
Younger people, on the other hand, tend to focus on the moment and believe that current conditions will continue forever. As a result, they tend to make poor investors.
Take the current property frenzy, for example. Many buyers are acting as if low interest rates and high capital gains are guaranteed and do not appear to have plans in place to counter any adverse events. Those who have been through a property bust or two tend to be more cautious.
US investment guru Richard Russell is in his early 80s and has been studying the markets for more than 50 years. When he talks, it pays investors to listen. This is what he says about investing in apartments, referred to in the US as 'condos'.
"When you buy a condo what are you buying? Well, instead of renting an apartment, you now own an apartment, and you pay the financing charge to the bank or mortgage company, and you pay the upkeep to the real estate company. And above all, you hope the price of your condo goes up.
“Here's my prediction. Within five years or less the condo situation will collapse, condo-owners will see the value of their condos heading towards zero, and they will be able to rent a similar condo for far less than the cost of carrying the condo that they 'own'.
"As condo prices collapse, 'condos for rent' will cover the landscape. Tens of thousands of condos will be offered 'if you will just take over the mortgage payments and upkeep charges'. In other words, condos will change hands for zip, nothing, if the new owner will simply take over the cost of carrying the damn condo.
"In all, the whole condo rage will be seen as a period of madness. People who paid today's high prices for condos will wonder how the devil they can get out of their ill-considered commitments. My definition of a condo - 'A chunk of debt surrounded by an expensive apartment that could be rented for a lot less'."
Economist Gary Shilling, who hasn't been around as long as Mr Russell but is no spring chicken either, holds a similar view. He notes apartment prices now exceed single-family home prices for the first time - a sure sign of speculative mania. Fortunately, he believes that most of the obvious bubble-prickers aren't a threat at present. These include rising interest rates, high unemployment or demographic changes. "The real threat: Prices will get so high that potential buyers will stand aside and nervous speculators will dump their properties on the market. Already the supply of existing housing is jumping."
Many investors say it cannot happen but more than one commentator has noted that Japan's property collapse in the 1990s is a chilling example (prices are still 80% below their late 1980s peak). "The destruction of housing wealth will end the quarter-century binge of borrowing and spending and initiate a consumer saving spree," he predicts.
