The Property Market Cycle

Transcription

1 STEP 1D 1 The Market Cycle When you start your research on properties to renovate, the very first thing you ll need to look at, is what stage your suburbs are actually in, relevant to the property investment cycle. This will be a key consideration as to whether you actually do buy at that time, where you buy & what you buy. What Is The Market Cycle? The property market cycle quite literally, relates to the 4 predictable cycle or stages, the property market naturally moves through, on a recurrent basis. Call it, swings and roundabouts. The 4 phases are: Boom Slowdown Slump Boom Slow Down Recovery Sell Investment Cycle Recovery Buy Slump STEP 1D PROPERTY MARKET CYCLE 1 OF 13

2 How Long Can A Cycle Last? While the property cycle has historically proven to reoccur, time and time again, there s no set timeframe that a cycle actually does last. The common belief amongst property experts is that the property cycle generally takes 7 to 10 years to run through its rotation. However, this is not always the norm. As more and more properties start to become financially out of reach for the majority of people (housing affordability crisis), this can by default, slow down the property investment cycle. In times, where prices have gone ballistic, this can slow down the cycle substantially from 7 to 10 years to 10 to 15 years or more. This means that suburbs where prices have risen sharply for a period of time, are unlikely to see continued capital price growth. In order to build a property portfolio, you must leverage capital growth. Therefore don t invest initially in suburbs, where the property values have already risen consistently & dramatically over the last few years. For these suburbs, the ship has already sailed, so to speak. STEP 1D PROPERTY MARKET CYCLE 2 OF 13

3 What Factors Affect The Cycle? There are numerous factors that affect supply and demand of property, which in turn leads to a growth or contraction in the market, driving the property cycle. These include: Interest rates when interest rates increase, demand for property drops due to higher mortgage costs that becomes unsustainable for many people. The availability of finance If interest rates are high and money is hard to get, there will be fewer buyers in the market, and vice versa. Population growth if there is high population growth, more properties will be required to fill that demand and in turn, supply picks up, and vice versa. The local economy and employment if the economy is strong and unemployment is low, more people can afford to buy and invest in property, so buyer demand gets stronger, and vice versa. Government policy and legislation policies on a federal, state or local level can impact property demand and supply. In fact, some policies and legislations are deliberately implemented to either slow or speed up the economy which affects the property investment cycle. Global economy & events overseas markets and events can cause a ripple effect into the Australian economy and subsequently, affect our property markets. Emotions if people see others getting into market, they can be incentivised to do the same, for fear of missing out. This drives demand. Conversely, when people stop buying (often through fear of the property market dropping), others become fearful and sit on the sidelines, dampening demand or the reluctance to buy. STEP 1D PROPERTY MARKET CYCLE 3 OF 13

4 The 4 Stages Of The Cycle While there are many factors to take into account, the property cycle generally runs through its four phases with similar identifiable markers, as outlined below. More Buyers Than Sellers Intense Media Interest Shortage Of Prices Increase Rapidly Prices Rising Boom Sell Investment Cycle Readily Available Housing Levels Tightening Yields Affordability Crisis Housing Oversupply Slow Down Rising Interest Rates Construction Prices Dropping Unemployment Is High Recovery Buy Slump Prices Fall High Rental Rentals Increase More Sellers Than Buyers During this phase, prices increase rapidly until they reach a peak, which is the perfect sellers market. is talked about everywhere and confidence is high, which leads to an increasing number of buyers outnumbering sellers and it s this high buyer competition for a limited supply of property in the market that pushes prices up, with properties selling fast. There s strong demand from developers, builders and renovators. There is a shortage of tradespeople which increases their rates. At this stage of the cycle, rental yields for investors generally drop, with prices rising faster than rents, turning properties into negative cashflow. STEP 1D PROPERTY MARKET CYCLE 4 OF 13

5 The Slowdown Stage Yields Affordability Crisis Housing Oversupply More Buyers Than Sellers Intense Media Interest Rising Interest Rates Shortage Of Prices Increase Rapidly Prices Rising Boom Sell Investment Cycle Buy Sell Slow Down Readily Available Construction Prices Dropping Unemployment Is High Housing Levels Tightening Recovery Slump Prices Fall High Rental Rentals Increase More Sellers Than Buyers In response to demand during a boom, supply usually increases through development and sellers looking to capitalise on the growth in the market. But there reaches a point where prices peak and become unaffordable, and buyers retreat, which leads to a housing oversupply. This phase is usually accompanied by rising interest rates and unemployment, which further dampens demand. With lower demand for property, including renovating and building, construction prices drop and tradespeople become more readily available. STEP 1D PROPERTY MARKET CYCLE 5 OF 13

6 The Slump Stage More Buyers Than Sellers Intense Media Interest Yields Affordability Crisis Housing Oversupply Shortage Of Prices Increase Rapidly Prices Rising Boom Recovery Rentals Increase Sell Investment Cycle Buy Slow Down Buy Rising Interest Rates Construction Prices Dropping Unemployment Is High Slump Readily Available Prices Fall High Rental More Sellers Than Buyers The slowdown leads to a slump in the property market, with the market correcting as it s known, and price growth either stagnating or falling. This is due to high supply and low demand, with more sellers in the market than buyers and properties taking longer to sell. At the lowest point of this phase, and when the market bottoms out in the property cycle, there is no confidence, which is the perfect buyers market. With fewer buyers around, there is less competition, and hence properties are cheaper to buy. During this phase, rental vacancies are usually high. STEP 1D PROPERTY MARKET CYCLE 6 OF 13

7 The Recovery Stage More Buyers Than Sellers Intense Media Interest Yields Affordability Crisis Housing Oversupply Prices Rising Shortage Of Prices Increase Rapidly Recovery Boom Sell Investment Cycle Buy Slow Down Slump Rising Interest Rates Construction Prices Dropping Unemployment Is High Readily Available Prices Fall Housing Levels Tightening More Sellers Than Buyers High Rental Rentals Increase Once prices hit the bottom, the cycle enters the recovery or growth phase where there is an upturn, with greater stability in the market. Improving confidence leads to increasing demand and in turn, decreasing supply, which means prices also start to rise, slowly at first. Rental rates also start to rise with lower vacancies during this phase. As this phase gathers momentum, with more buyers getting the confidence to jump into the market, and with properties selling more quickly, the pace of price growth picks up. STEP 1D PROPERTY MARKET CYCLE 7 OF 13

8 Different Markets Will Be At Different Stages Of The Cycle It s important to understand that 15,273 cities, towns, villages and suburbs exist in Australia. The Australian property market therefore can t be considered as a whole, as it consists of lots of different submarkets that is, local markets within broader markets - and at any one time, they re at different stages of the property cycle due to different drivers, or factors, as outlined previously. Consider our capital cities, and what stage they ve been in the property market cycle in recent times. While Sydney and Melbourne have been booming, Perth has been in a slump, which illustrates how very different markets can be. On top of this, sub-markets within a suburb can also be at different phases of the cycle, as can regional areas. The key here is becoming a suburb expert and knowing where your target suburbs are in the property investment cycle, before you buy. Why Do You Need To Understand The Cycle? Knowing how the property market cycle works and being able to identify which stage a particular market is in, will help you determine the right time to invest in an area. It s important to know where the market is within the cycle, as it can help you to buy a property at the right price, which I ve always maintained is crucial to making a profit on a renovation project. If you buy when the market has peaked, and you overpay, you can be behind the eight ball, right from the start. Conversely, if you buy at a fair market price, when the market is in any of the other stages, you re significantly more likely to make a profit. Similarly, if you sell at the right time (ideally when the market is booming), you can maximise your sale price, which increases your profit margin. Understanding the property cycle can also help you pinpoint where to buy. If you re open to investing anywhere in Australia, you can look at which capital cities are in the most ideal phase of the market cycle, then drill down from there to individual suburbs. There are, after all, properties ripe for renovation all over the country. STEP 1D PROPERTY MARKET CYCLE 8 OF 13

9 When Is The Ideal Time In The Cycle To Buy And Renovate? The perfect buyers market and hence, the best time to buy, is at the lowest point of the property cycle, when the market bottoms out at the end of a slump. This is when confidence is at its lowest, resulting in more sellers than buyers, hence giving buyers, the upper hand. This is when buyers are able to negotiate a lower price and potentially bag a bargain. While many buyers at this stage are standing on the sidelines, you shouldn t be put off. Counter-cyclical investing, where you go against the grain and buy when others aren t and refrain from buying when everyone else is, is the best way to make money in property. While it s ideal to buy at the very bottom of the market, picking this point is going to be next to impossible. It will only become clear once the recovery stage has well and truly started. Buying at any time during the slump, will be the most beneficial point in the cycle for property investors and renovators to buy in. It can still be advantageous to buy at other phases of the market, with the next best times being towards the end of a slowdown phase or at the beginning of the recovery phase. But keep in mind, you can successfully renovate for profit in any of the 4 stages of the property investment cycle, simply because the underlying premise of renovation is about adding value / manufacturing equity, regardless of what the market is doing. As long as you buy and sell in the same market, you ll always be fine. Example If I bought a property in the slump stage, I might buy the property 15% below market value. If I plan to renovate and sell that property immediately on completion, expect to sell your renovated property, 15% below its true value. This is the true definition of buying & selling in the same market. STEP 1D PROPERTY MARKET CYCLE 9 OF 13

10 It s best to avoid buying property, nearing the end of the boom phase, if you re planning to renovate and rent. There is a great risk that your property can drop back in value (historically between 5 to 25% price decreases). At the end of a boom phase, it can be a good time to offload some of your property assets and sell the ones that you ve already maximised the value. This will enable you to free up cash and equity to pounce on a property deal when the market has moved to the slowdown or slump period. This is a sensible strategy for anyone who is highly leveraged where you don t have copious amounts of equity. I m not saying don t buy. Just time your buying On the other hand, if your equity is OK and a price drop wouldn t be the end of the world for you, always hold your property assets, for as long as you can. You ll be a bit poorer on paper for a while but as the property cycle swings around again through the cycles, your property will pick back up in value and you ll get the next injection of capital growth. It s important for you to know that in boom markets (due to intense buyer hysteria), many properties get put to auction, in the hope of buyers losing their head ( I must get in mentality). Your ability to buy an unrenovated property at the price you need becomes significantly harder. In these markets, it s still possible to buy well at any phase of the cycle, but only if you do your research and look for opportunities, such as off-market transactions or For Sale properties. Just don t expect to be successful at buying a property at the price you need to, at an auction in a boom phase. Generally, if renovators buy prior to the market rising in value, not only will your property value increase through the equity you ve created in the cosmetic reno itself, but through capital growth as well which ultimately maximises your leverage of equity into your next property deal. STEP 1D PROPERTY MARKET CYCLE 10 OF 13

11 In addition to considering price growth, as a factor for when you should buy, you should also consider the costs of tradies. This is when buying on the slowdown or slump phase of the property market cycle will be doubly beneficial, as tradespeople are more readily available, and in some cases, cheaper. If you buy in the boom phase, there ll be a shortage of tradespeople, which means renovation costs significantly rise, and your profit margin narrows. When Is The Ideal Time In The Cycle To Sell? The perfect sellers market and hence, the best time to sell, is when the market or prices reach a peak, at the very top of the boom phase and the property cycle. This is when buyers outnumber sellers and sellers therefore have the upper hand, being able to command higher prices for their properties, due to strong buyer competition. Just like picking the bottom of the market, it s impossible to pick the top of the market. But selling at or near the peak, or at any time during a boom will be the most advantageous. The next best times to sell are during the slow down, particularly at the beginning, and during a recovery, especially after it s gained momentum. Where possible, renovators should avoid selling any of their property assets, during a slump. When you do a renovation project, you should consider the timeframe (ie: how long the project will take to complete) & what stage of the cycle, the property market will be in, at that time. But as well as thinking about the cycle, you ll also need to consider the time of year the property is taken to the market from a seasonality point of view. At some times of year, there will be very few buyers around, such as in winter and around Christmas, except if you re in a tourist location, in which case selling in December of January, can actually be the best way to go. Do Renovators Need To Time The Market? While there are ideal times to buy and sell that help you maximise your profits for renovating, you can undertake a successful renovation project, in any market, if you follow the process I outline in this course. While you do need to look at the property market cycle and ideally buy in the best stage, there are always markets (particularly on a local level) all around Australia where demand STEP 1D PROPERTY MARKET CYCLE 11 OF 13

12 always exists and the numbers stack up to successfully renovate. So once you first look at the cycle to determine whether it s a good time to buy or not, you then need to drill down and look at individual suburb level to determine the supply and demand and what is pushing the market along. I ll explain this further in Step 2D Suburb Selection. While many people try to pick the market and the exact right time to buy, if you spend too much time agonizing over it, you could inevitably miss the mark or never buy anything at all. Think analysis-paralysis. You should buy when it suits your circumstances, when you have the ability to borrow the finances to do the project, and only when you ve done thorough research and planning. Is There Any Time You Should Not Buy? Renovators in booming markets, need to understand they re investing in a hot market knowing where it s at in the property cycle and exercising caution. The market is less stable, driven by emotional buyers competing to get into the market, and while this can be great when you re selling (as you ll likely get top dollar with good properties snapped up), the market can turn at any unpredictable point in time, which could see your property linger on the market. It can also be tricky when you re buying, as you ll be competing with lots of emotional sellers driving the prices up, and this can make it harder to buy at a price that makes your renovation profitable. Many say timing is everything, but there s no bad time to renovate. If you follow the right steps and the advice I provide in this course, and run the numbers properly before buying, you ll be able to make money in any market. I have, and continue to make money in all stages of the property cycle. You Can Change Strategies If Necessary Renovators can also choose to hold and rent their renovated properties, rather than sell, if the market isn t ideal or prices have fallen. When the recovery starts again, rents will go up, making the property easier to hold, and when it booms again, you can continue to hold and benefit from natural capital growth or elect to sell. STEP 1D PROPERTY MARKET CYCLE 12 OF 13

13 How Can You Tell Which Stage Of The Cycle A Market Is In? Before you decide when and where to buy a property to renovate, do some research to determine what stage of the property market, the cycle is at. You can tell by: Looking at recent price growth in the area. Finding out how fast properties are selling. Assessing how many people are attending open for inspections. The level of media interest in property. Talking to real estate agents. If there s an abundance of property on the market for sale, homes are taking a while to sell and there s only a few buyers around, it s a good indication the market is in a slowdown or slump. On the flipside, if prices are growing, there are hardly any properties for sale and properties are being snapped up as soon as they hit the market, with lots of buyers at open inspections, it s indicative that the market is booming. STEP 1D PROPERTY MARKET CYCLE 13 OF 13