Can we Predict the Future?

It’s crazy to think that anyone can predict the future, but plenty of people are paid good money to try: Economists, Weather Forecasters, Fortune tellers, Treasury, Technology companies, etc.

Even though no one can predict the road ahead, it’s absolutely vital that we pay attention to what lies ahead of us. If we look at the future from a personal perspective, we think about our own health and maybe the family history that has gone before us.  We also need to think about our financial future too, as the money we accumulate is going to determine the quality of life and standard of living we enjoy.  If we think it back to our health, it’s also going to pay for the level of health care we receive in later life……

When one looks at investing, the predictability of the investment is extremely important.  The only problem is the level of predictably also usually impacts on the returns, because if you have a predictable return then risk level is traditionally low.  If you have an unpredictable investment the risks are usually very high, so the returns on the investment would need to match or exceed the risk, otherwise you wouldn’t get investors investing.

When it comes to direct residential property investment, history is usually an extremely reliable measure for predicting the future performance, with the exception of one major variable—economic performance of the location/city/town.

Let me share an example: During the gold rush, many towns such as Ballarat and even you could argue a city (Melbourne), were born out of an economy driven by gold. When the gold dried up, the economic impact to the towns (some now don’t even exist) to the city were severe, having huge impacts on land and housing values. Fast forward to today, where Melbourne has become the second largest city in Australia and its overall economy is a mix of multiple industries and services, it’s no longer a one industry town.

So it’s fairly easy to argue that the long term trend in values since the Second World War and then recently in the 70’s & 80’s, when women started to join the workforce, creating greater household income and discretionary spending, that this historical value trend should continue, so long as Melbourne maintains a robust and diverse economy.

Sure we are going to see ups and downs along the way but the long term trend data is relatively predictable. In Melbourne’s case, the long term capital growth rate is around 8.3% since 1974, when the Valuer General stated to collate this data. And here’s the magic of a predictable asset like property, the risk is relatively low, but when you leverage (borrow to control a greater valued asset) you magnify the returns.

Let’s use an example: Say we had $50,000 in equity or savings, this amount could be leveraged to secure a $500,000 asset.  If the asset performs to its predictable return, then in 10 years that asset will be worth $1,109,825.  That’s an amazing return on your $50,000 isn’t it!

I need to remind you, that loan interest, stamp duty, maintenance costs etc, are going to have to come out of this gain, but still one relatively ‘predictable’ property investment will make a sustainable impact on your future wealth, if executed and managed correctly.

And it’s this sort of predictability that wins over my mind as a superior investment class for me and my clients.