The Investment Property Clock
When it comes to investing in property there are four fundamentals that you need to get right:
This Investor’s Guide will cover the all-important topic of knowing when to buy, and how to understand the Property Clock that drives property prices.
The Australian property market in perspective
There is an enormous amount of coverage and analysis of the Australian share market. All the fund managers, the institutional investors, overseas investors, the mum and dad investors, plus those with Self Managed Super Funds. It’s a big market – and worth $1.52 trillion at the time of writing.
In comparison, the Australian property market dwarfs the share market, with our total housing stock valued at an incredible $5.2 trillion. There’s big money to be made, so knowing the fundamentals of how the market works is key to your long-term success.
With a value more than three times the value of the share market you’d think there would be even more in-depth analysis and professional reporting of the property market. Sadly, the opposite is true, and all too often the media get it wrong, misleading consumers in the process.
“Do your homework” is good advice for investors, so this article aims to help you do just that. It gives you one of the tools you need for investment success – knowing when to buy.
With so much money in play, the good news is that the property market can be read and mastered.
Nine out of 10 millionaires made their money
from real estate. If they can do it, you can too.
Property prices increase over time
We all know that in the long run, both the share market and the property market increase in value. This is shown in the charts on the next two pages both dating back to 1987. What has happened before, can happen again.
While the share market is more volatile, the long-term trend for both the property market and share markets is up.
This chart shows the Sydney and Melbourne property markets over a longer period of time. Who wouldn’t have loved to buy a property (or two, three, four or more!) when they were priced under $20,000, all those years ago.
And the Cairns market below shows a similar pattern at work in a smaller city.
What is clear from these charts is the importance of knowing when to buy. Although trending up over time, property markets fluctuate along the way, and can go sideways as well as down.
There are two ‘musts’ for investors:
- Avoid buying when a market is peaking or starting a downturn
- Buy when a market is poised for strong growth or is just turning up.
What tends to happen, however, is the exact opposite!
When markets go on a run, suddenly everybody notices it. The property market, and the money people are making out of it, becomes a hot topic at barbeques and dinner parties. The media fills with stories of the amazing price growth, as we have seen recently with Sydney and Melbourne.
Then what happens is people feel “panicked” if they are not participating as the good times roll. They feel left out. So the “herd effect” kicks in, and many follow the crowd. Some novices invest at a time when smart investors are waiting on the sidelines.
Simply shown, the process unfolds as can be seen in the chart below.
The investment property clock
The Investment Property Clock is the name and symbol used to describe the cyclical nature of property markets.
This cycle holds true for virtually every suburb and town in Australia, and over time they all follow this pattern of ups and downs in property value.
Despite the media referring to “the property market” as if it were one, there is no single “Australian property market”.
Australia has six states and two territories. Within these there are over 30 cities with a minimum population of 50,000 people. In capital cities like Sydney and Melbourne there are hundreds of individual suburbs, all moving at a different phase and pace through the cycles of ups and downs in property prices.
Even in the case of Sydney, where the median house price jumped 15.9% in the 12 months to November 20141, the Australian Property Investor magazine shows there are suburbs that grew 40% or more (e.g. Artarmon, 40.6%), while others have actually gone backwards (e.g. Breakfast Point –1.5%).
So even a city like Sydney is not one market. It comprises hundreds of individual suburbs or markets, each with their own post code, all connected and inter-connected, but not all marching to the beat of the same drum.
The good news is this means there are opportunities everywhere, all the time. The converse is also true; for unwary buyers, there are plenty of risks and downsides, all the time.
http://bit.ly/1Akc4g4 Australian Property Investor Magazine, January 2015, Market Watch Houses, pp122, 123
The four stages of the property clock
The market moves through four separate stages, with sub-phases in each. I see the stages similar to the four seasons. They all have their time, they all have their merits, and they are all inevitable.
We move from one to the next whether we like the particular season we are in or not. And we need to be prepared.
This is the upper turning point of the cycle, where prices have peaked and prices have started to turn down. The characteristics of each phase are listed below so that you can refer to them and interpret what is happening in the markets.
Start of slowdown
- Rental yields are poor as rentals haven’t kept up with rising prices
- The ratio of mortgage payments to income approaches 40%
- Poor affordability means fewer buyers, so the number of sales falls
- Auction clearance rates and attendance at auctions drop off
- Off-the-plan developments are completed (often started years before)
- More stock comes onto the market than it can absorb
- Off-the-plan values are less than the prices paid, so buyers walk away from deposits
- This depresses prices further
- Developers and builders carry the high overheads needed to meet previous demand
- Developers discount unsold stock (apartment buildings and land)
- Prices fall across the board
- Real estate agents become more responsive
- The price of building materials starts to fall
- Tradespeople start competing for jobs on price
Final stage of slowdown
- Negative media reports “talk down” the market
- Trading conditions worsen
- Prices continue dropping
- A sense of fear emerges as some people feel exposed
The slump phase is not pretty for many, particularly for those who bought while markets were at their peak. They see the value of their property sliding, sometimes to the point where they have no equity left in the property.
Start of slump
- Projects are left unfinished around the city
- It becomes cheaper to rent than to buy
- The fear of unemployment increases
- There are more tradespeople than jobs
- Redundancies start in the building industry
- Mortgagee sales start as banks protect their interests
- Large companies fail – including developers and financiers
- This triggers the collapse of smaller suppliers
- benefit as they sold at a fixed price and now enjoy falling construction costs
- Developers discount to clear unsold stock
- Tradespeople and small builders put flyers in letterboxes
- There are calls to reduce interest rates as everyone is hurting
- Limited new stock comes onto the market
- Auctions are poorly attended
- Private treaty sales become more popular than auctions
- It’s a buyer’s market in full swing
End of slump
- Inexperienced investors lose confidence and decide to sell
- There are more sellers than buyers
- The media hypes the situation with hard luck stories
- If it’s a national slump, we read about “Recession”
- Banks value property below replacement cost
- Unemployment continues to rise
- Consumers are afraid of making financial commitments
- Buyers can purchase property below replacement cost
- For investors, rents equal mortgage payments, which is the “the sweet spot”
- There’s little work for builders
- Construction and material prices fall further
- Experienced investors start looking for opportunities
- Interest rates are reduced to stimulate demand
- Bank credit policies are loosened to attract borrowers
- State governments stimulate demand by offering incentives e.g. first-time home buyers
The recovery phase is what smart investors should be looking for, but which many miss, because it creeps up on us unseen, and unannounced. This is when the best opportunities are to be found. By picking the start of the recovery phase, you can benefit from increasing demand and the capital gains and rental increases that go with it. As it gathers pace the recovery is like the green shoots of spring – meaning good times ahead.
Early stage of recovery
- Rentals start to rise due to a shortage of properties
- The shortage is due to population increases while building stopped
- Vacancy rates start to drop
- Investors get more interested and become active
- The market tightens with reduced choice for buyers
- Shortage of blocks to build on due to lack of development
- Buyers “camp out” to try to buy a block of land
- Auction clearance rates increase
- Building material prices increase
- More construction work is available
- Construction costs increase
End of recovery
- Property valuations pick up
- Mortgagee sales taper off
- Business picks up in display villages
- Discounting is reduced
- Demand exceeds supply
- A seller’s market emerges
In a housing boom, prices simply take off. For those in the market it’s a very positive time. Owners experience the ‘wealth effect’, where the increases they see in property around them make them feel wealthier as their assets are worth more on paper. For those not in the market and trying to break in, it is very depressing. Some start to panic as they see the market racing away from their income and savings.
Start of boom
- Still cheaper to rent than buy
- Tradespeople raise hourly rates to catch up with the cost of living and past losses
- Building supply companies restore margins with monthly price increases
- Developers margins get squeezed as they have a fixed sales price but face increasing costs
- Real estate agents become hungry for listings and drop flyers
- First home buyers get priced out of the market
- Money is cheap and more freely available
- Banks start to compete to lend money
- There are more buyers than sellers
- Investors get the blame for rising prices
- There are calls to cut or restrict negative gearing
- It’s a buying frenzy and everyone seems to be making money
- Demand for display units and off-the-plan properties skyrockets
- Buyers panic and fear they will miss out
- Hopefuls kick themselves for waiting too long
- Inexperienced investors dive into the market
- The Reserve Bank issues warnings about prices
- New builders jump into the under-supplied market
- Media reports hype up stories of amazing profits and sale prices
End of boom
- Overseas investors blamed for pushing up prices
- Calls to end foreign investment in Australia
- Real estate agents slow to return calls
- Open houses attract big numbers of interested parties
- Tradespeople don’t turn up to complete jobs as they are busy with new ones
- The Reserve Bank increases interest rates
- Banks become cautious about exposure to building companies
- Banks can call in loans and trigger company collapses
- Calls to limit money supply to investors or to tighten credit
- Mortgage stress bites as costs reach 40% of household income
- Interest rates increase further
- Demand slows as high prices and interest rates affect affordability.
…it’s back to the beginning, and the cycle starts afresh. History suggests that on average a full property cycle takes from seven to 10 years to complete. Along the way there will be winners and losers:
Some people will make lots of money through good timing
Others will miss out completely and have to wait for the next downturn.
Those who sell at the bottom will have missed the opportunity for future capital gains, having passed the opportunity to more savvy buyers.
For every buyer there is a seller. The cycle goes round and round, and prices go up and down. So time in the market is just as important – if not more so – than the timing of when you invest.
Which side of the equation you end up on depends on how well you can read the signs and phases of the Property Clock. Armed with this information you can be an alert, smart investor who buys into an area that’s ready for strong growth, from a seller who’s motivated to sell to you!
Finally, if you want to find long-term opportunities to make money in the $5 trillion opportunity that is the Australian property market, “You have to be in it to win it”!
About McCarthy Group
McCarthy Group has a successful 15-year track record in investment property that has enabled hundreds of everyday working Australian families to change their lives for the better. Our tried and tested formula is based on:
- Knowing where and when to buy
- Buying the right property
- Use the right ownership structure
- Buying new to maximise benefits
- Holding property for the long-term
- Using professionals for tax, finance and property management.
If you would like to get into the investment property market but don’t know where to start, contact us on 1300 850 318 or email us on email@example.com
We’ll provide the expertise, guidance and support you need to get going.
And to find out what our customers have to say about their experience with us, read theirtestimonials.
- Request an obligation-free appointment mccarthygroup.com.au/contact-us
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