UNDERSTANDING THE PROPERTY CYCLE

I often get asked ‘when is the best time to buy?’ and how to time the market so that my clients are getting in and out when they should be.

Being an active investor myself, I understand the cycle but am unfortunately restricted to the amount of professional advice and direction I can give.

The below is an excellent explanation by your investment property magazine. I have shared this with a handful of clients and not only is it easy to understand but also a useful tool when making that all time important decision of whether to buy or be patient and wait it out.

The easiest way to understand property cycles is to use a property clock. If you use a normal analogue clock you can reference where we are in a cycle.

The clock has hands; we use the hands to determine where we are in the cycle.

The peak is at 12, and 6 o’clock is the bottom.

‘Slide’ sits at 2 o’clock, which follows a market high and is when the market begins to cool.

A good sign that a market is in the ‘slide’ period is that values are beginning to slow by 5–10%. This period normally lasts about a year; however, at this point people are in denial about the market’s viability. Don’t be afraid to leave the market at this time, even though everyone else appears to be sticking it out. Otherwise known as the start of the slowdown, this usually goes on for a year and is accompanied by denial as a sentiment condition.

‘Trough’ sits at 4 o’clock and is easily recognised as a falling market. At this point, fear and desperation permeate the marketplace, with values floating above the CPI (Consumer Price Index) at a 3–4% growth rate.

It can take up to five years to work through this cycle, but if you’ve been watching the markets you won’t have to worry about this stage. Sometimes people assume the market has ‘bottomed out’ and will buy in this stage although the market has further to fall. In what is otherwise known as a general slowdown, approaching the bottom, the market psychology is fear and desperation.

‘Bottom’ of the market is at 6 o’clock – a great time to buy! This time on the property clock is often referred to as an ‘opportunity market’ as it is easy to buy at a discount from panicked sellers. The corresponding psychology is capitulation.

When a market has hit rock bottom, it will be sitting still. There will be a small volume of sales and lots of great opportunities to achieve discounts from desperate vendors. At this point the market sentiment is one of resignation, which normally lasts about a year.

This does represent a great time to buy, and for those investors willing to gamble that the bottom really has arrived, it’s possible to achieve amazing results. However, as investors we typically try to catch the market as it’s starting to rise, coming off the bottom.

The ‘Rising’ market is at 8 o’clock – the absolute best time to buy for most novice investors. While buying at 6 o’clock is great for discounts, often in a rising market valuers are still looking to the past for data and will value the houses even lower, and because the market is actually rising you can realise your profit a lot faster.

To do this we keep an eye on capital growth in the area, even drilling down to the suburbs, looking for a solid 2.5% growth per quarter, totalling 10% in a year’s time. This is a strong indicator that the market is moving in the right direction. This period lasts anywhere from one to three years. Once the market has achieved its first 5–10% growth in the first year, we know this is a great time to buy.

Otherwise known as the start of recovery and a rising market, the market indicators are easy to read and they point towards growth, which is already happening with more certain to follow. This generally lasts for three years, and the feelings are of hope and optimism.

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
The market is ‘Hot’ at 10 o’clock and should be avoided for property purchases. Prices will be shooting up quickly, which is great if you have a property in the market, but it means that the demand is high and people will be scrambling to get a property.

This is when people are willing to negotiate a lot higher than the asking price. Also known as approaching peak, the expansion has occurred and all buyers are believers. 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, which typically lasts about a year:
• Everyone is excited and talking about the area
• Time on the market is very short
• Vendors consistently receive their asking price, or even more
BOOM is at 12, which means you should not be buying, but it’s is a great time to sell. Obvious signs of a boom are lots of interest from the media and rampant growth for three years in a row. Otherwise known as market peak, this is the ceiling on market growth within any normal cycle. Its length is roughly six months and its corresponding psychology is euphoria.

Always remember: The A-class buyers buy at the bottom of the market. B-class buyers buy in a rising market and C-class buyers buy at the top of the market. The A-class buyers sell to the C-class buyers, and the C-class buyers take the 12 o’clock to 5 o’clock loss in the market.

Therefore, you should buy between 5 o’clock and 9 o’clock on the property clock, as anything outside of this isn’t a wise investment.

For an honest and unbiased opinion, talk to Mitesh at Think and Grow Finance today on 03 8390 5855 or email mitesh@thinkandgrowfinance.com.au