To do well in real estate it’s all about “the buy”. If you buy low and then sell high you make money. Or if you buy low and then re-value high you can borrow more to buy again.
One of Melbourne’s top buyers advocates said to me during the week that picking the right market is 80% of the battle. The actual property is secondary and the right price for that property is less important again.
But picking the next high growth suburb is unfortunately very complicated, everyone reads the market differently and has differing views.
However the one thing about the housing market which is very predictable, is the way it moves through cycles.
These cycles are illustrated by the Property Market Cycle Clock, and can at least explain theoretically, the right time to buy or sell.
The Property Market Cycle Clock
In the Property Market Cycle Clock 6 o’ clock represents the bottom of market. Of course this is when you want to buy because prices are at their lowest (e.g. Sydney 2012).
At 12 o’clock the market has peaked and prices are at their high point. Obviously this is when you want to sell because prices are at their highest (Sydney now, perhaps??).
It’s difficult to know how long each full cycle runs for, but what we do know is that the time it takes to go from 6-12, is generally a lot faster than the time it takes to go from 12-6.
Say you approach a real estate agent at 6 or 7 o’clock in the cycle and tell them you want to sell your property. Your property’s worth about $600,000, but the agent says he thinks you can achieve $650,000 for you. So you push for $650,000, and you achieve that. Fantastic! This gets the market moving very quickly.
All your neighbours want to sell for these higher prices and off the back of your success they are successful too. Prices continue to rise and buyers become comfortable at these higher levels because that’s what everyone else is doing. It becomes the new norm.
Now consider the other side of the Property Market Cycle Clock, the 12-6 side.
You approach the agent at 12 or 1 o’clock in the cycle and tell him you want to sell your property. It’s now worth about $900,000 according to recent comparable sales, but this time when it comes to auction the agent tries preparing you to accept anything over $850,000, because the market’s starting to turn and we can’t afford to not sell, and certain buyers pulled out last minute etc. etc.
You insist on $900,000……. and then, NO SALE.
A few miserable months go by and nothing happens. Then a potential buyer suddenly comes about and you agree to sell for $850,000, almost out of frustration and desperation.
The same then carries out for your neighbour, they end up selling an equivalent house for $850,000, or even $825,000, but again it takes a long time to go through the motions. It takes longer for people to acknowledge that prices are falling and all sales processes tend to drag out.
Over the past two weeks (October 2015) all of the major Australian banks have raised interest rates by around 20 basis points, out of cycle, in response to new capital requirements which threaten their profits.
All housing markets are localised and perform differently, but many believe these rate rises will trigger prices in Melbourne and Sydney to start flattening out, and eventually fall. The suggestion therefore is that we’re at the 12 o’clock in the property cycle, and we’re now in for a rough ride downwards.
In a rising market everyone wins. But during difficult times the weak get found out quickly. They can’t afford for prices to fall (often they are over leveraged, or they need to sell for whatever reason because they need the money), so they are forced to sell in undesirable circumstances.
At what point in the Property Market Cycle do you think your city or suburb is in, and have you thought about your strategy and positioning for the next phase ahead?
