Property warnings and hope for planners

The property market could be in for a significant correction. That was one of the messages I delivered in my keynote address during The Intelligent Investor’s recent seminar tour of Melbourne, Adelaide and Perth.

Preparing for a range of futures, rather than predicting any particular future, is the cornerstone of The Intelligent Investor’s approach. And, after gathering and dissecting a range of data from specific Australian properties through to broad averages sourced from the OECD, it strikes me as wise to be prepared for the possibility of a significant pullback in real property prices.

It’s clear that most people who call themselves “property valuers” are lying. They are, in fact, property pricers. They will provide an estimate of the price a particular property is likely to fetch in the current market environment, largely based on recent comparable sales. Experienced investors will immediately spot the flaw in this approach. Novices may not see the problem at all.

Isn’t the value of something simply equal to the price someone else is prepared to pay for it? Of course it’s not. That’s the kind of spurious reasoning that sucks people into booms: James Packer and Lachlan Murdoch have been buying shares in One.Tel, and if they’re prepared to pay this price, then the value must be at least as much. Wrong.

The value of any financial asset is the sum of all the cash flows it is going to put in your pocket over its life, discounted back to today’s dollars. And any Australian property I’ve seen subject to such discounted cash flow analysis (based on a sensible set of assumptions) comes up significantly overpriced. Around the corner from my office, in a real estate agent’s window, there’s a cartoon. It shows a stooped, wrinkled gentleman with a walking stick. Underneath is the caption: “This young man is waiting for property prices to fall.”

Such salespeople would have us believe that property doesn’t fall in price. That’s baloney. There are plenty of global precedents for nasty property bear markets: Japan, Germany, Korea and Switzerland, to name a few recent ones. I fully expected that my warning on property would be received badly by a hostile audience. It wasn’t.

Many people said that they had worked through similar mathematics themselves and arrived at the same conclusion. They were interested to see that the international case studies in my presentation, based on the OECD data, reinforced their sombre conclusions.

The seminars produced another surprise. In the February edition of Professional Planner I published my rather bleak prognosis for the fee-for-service financial planning industry: “Quite apart from an industry desperately hooked on the current dominant commissionbased business model, I’m not convinced that consumers are ready to change either. Just because something is demonstrably beneficial doesn’t mean it will be automatically embraced. “As much as I’d love to see it happen,” I continued, “I’m not convinced that the financial planning industry at large will change any time soon. Between the advisers hopelessly addicted to the current arrangement and consumers’ distaste for appropriate up-front fees, it’ll be an uphill struggle.”

My view has now softened. The hundreds of investors attending our recent seminars were able to choose from four workshops, including one on superannuation, for which we brought in a financial planning specialist (it almost goes without saying that he operates a fee-for-service model). We were pleasantly surprised at the number of our members who expressed interest in receiving financial planning advice on this basis. So surprised, in fact, that we’re considering an opportunity to join the sensible and growing fee-for-service industry.

Perhaps our members – long-term value investors – are predisposed to such sensible arrangements, which we describe as pain today, gain tomorrow. Whatever the case, many recognised that the average financial planner is not incentivised properly. They’re also cognisant of the difficulty in selecting an adviser with ability. We’re currently discussing ways we could bring together talented fee-for-service planners with our 10,000-strong readership. It’s an exciting prospect.

The members who attended the superannuation workshops at our seminars provided feedback like “outstanding” and “very helpful”. And, like all successful businesses, when our customers speak, we listen. We’re also happy to listen to any fee-forservice planners who might like to get in touch.