From boom to bust to bubbles, if you’re thinking of investing in property, it just makes sense that you understand some of the basic principles of property cycles in order to maximise your profits, or minimizes your losses – whatever the case may be!
You might have heard experienced investors talk about timing the market vs. time in the market, with valid arguments for each. Although, the name of the game is putting your capital to work in an efficient manner – so no matter what camp you’re in, it pays to understand as much as possible about property cycles in order for you to move towards your goals. Whether you’re a beginner, a novice or an amateur investor, our quick guide will give you a good idea of how it works, or at least give you the smarts to be able to participate in any real estate speak at your next BBQ!
What’s the point of understanding property cycles?
In order to maximise your chance of success, you need to be able to locate upward-trending areas. The beauty of living in Australia is that there are different markets across all of our States with different property cycles happening in each. Don’t be afraid to look at investing in other states or territories other than the one you live in!
What is ‘normal’ market behaviour?
The term ‘normal market behaviour’ is relative and specific to each market. There is certainly no blanket definition of normal across the country. To successfully analyse normal market behavior you need to understand the basics of supply and demand economics.
As an example our larger cities with high demand and a constant strain on supply due to lack of land, tend to ‘normally’ experience the most solid growth and steady prices. The growth of household income versus house prices is also a smart way of assessing a market’s ability to grow. The best way to look at this is to consider that if the current wages can’t afford the higher house prices, then property values may stagnate.
Markets have four affordable zones:
Bearable market: If the demographics of the area show that people are able to easily afford the local property prices.
Equitable market: Measured in terms of the market’s ability to bear the cost of a property. E.g. if a seller wanted to remove his equity in his home by selling, would he be able to do so? If yes, then the market is equitable.
Sustainable market: A market that is sustainable will be growing at a fairly steady rate and maintain affordability for a wide cross section of prospective buyers.
Viable market: If all of the above requirements are met, then a market is considered to be a viable choice for property investors.
What are the signs of a rising market?
- Interstate investors investing in the area (will push prices up)
- Auction clearance rates in excess of 50%
- Local investors beginning to return to the market
What is a ‘hot’ market?
A hot market represents peak demand and is one where prices will be rising quickly as people scramble to buy property and may pay a lot more than the asking price. This is a fantastic market for selling but a poor one for buying. It lasts for about a year, and the psychology is excitement and thrill.
Signs of a hot market include:
- Everyone is excited and talking about the area
- Time on the market is very short
- Vendors consistently receive their asking price, or even more.
How can I tell once the market has shifted?
There are a number of markers to be aware of when considering the condition of a marketplace to identify the tipping point:
- Everyone is talking about investing in “XX” market. Sentiment is at an all-time high so people are caught off guard when news of the market’s imminent demise becomes evident.
- Valuations will begin to change as major valuation companies revise their opinions of the suburb or town, negatively impacting the liquidity of the marketplace.
- Sales to locals are likely to diminish.
How will a changing market impact my ability to secure a home loan?
Obviously a cooling market will cause a higher level of scrutiny from lenders, but lending conditions will change throughout the property cycle. Some things that may occur in a changing market are:
- Buyers will be unable to find lenders mortgage insurers willing to lend in the area, severely limiting their borrowing options and ruling out 90% lending.
- Lenders will require higher deposits as loan-to-value ratios (LVRs) drop to as low as 70%.
Being an informed investor can take practice and experience is often the best way to learn! Regardless of where the market is at, there is always opportunities to maximise profit and mitigate your exposure by doing lots of research and keeping a level head. Speak to one of our brokers about your own unique goals for your property portfolio and together we can devise a solution that may work for you.
* All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.