The Property Clock


The Property Clock

Whether buying or selling a property, it is important to get the timing right so that you aren’t exposing yourself to an elevated risk of losing money or a missed opportunity of making money. You might say to yourself “you can’t go wrong with property; it all goes up in value eventually” and you might be right, but you might also be missing out on maximising your ability to build your wealth effectively.

 

Think about the investor who bought a house in Sydney in 1989 at the top of the peak, and then had to wait until 1996 before the median price returned to the same values after falling as far as 17% in between those 7 years.

What if that same investor had bought a house in Brisbane instead? For less than half the value of Sydney, by 1996 that same investor would have achieved nearly 70% growth on their Brisbane asset versus 0% in Sydney.

Roll forward to 2018 and Sydney has been performing at double digit growth annually since 2012. The last time Sydney had 6 consecutive years of double digit growth, it then stagnated for the next 6 years.

 

Why does this happen, and how can we predict what is going to happen with confidence?

The short answer is; that a Property Clock can help us determine what is likely to happen in the short-to-medium term. Why cycles occur is a little more complicated, but still important to understand. 

Property markets go through cycles of boom and bust – some more extreme than others – but all major regional centres and capital cities experience cycles. Cycles are formed by predictable human behaviour, simple supply and demand economics. When times are good and we can afford to spend more on a property, we do. Then building approvals soar as developers look to make money on the increasing demand. Before the rush of building commencements hit the market, property prices are driven higher, to a point where it no longer becomes affordable to keep buying at those levels. Consequently, the market becomes oversupplied with new housing and prices either stagnate or fall until the surplus housing supply is absorbed.

 

We can plot this cycle on a diagram that looks like a clock, so that it is easily understood.

Property Clock

 

The peak or top of the market is at 12 o’clock, and the bottom sits at 6 o’clock. If you follow the hour hand of a clock in a clockwise direction, the price recovery of a property market that has been through a correction happens between 6 o’clock and 12 o’clock, and the correction occurs after 12 o’clock until around 6 o’clock.

The Property Clock is ubiquitous worldwide, however, the pace of the hour hand does change from market to market. It is true though that over the long term (25+ years), capital city markets and regional centre markets work at two different paces, historic price data proves this. The regional centre recovery and correction periods tend to be at the same pace of 5-10 years of upswing and downswing equally. Capital cities tend to recover or appreciate around a 7-year period, however tend to correct much quicker on average between 4 and 7 years.

 

Ok, so how do we know where a region, capital city or even a specific suburb sits on the property clock at any given point in time?

Ruling out abnormal factors such as international affairs, government policy and natural disasters, we regularly review a handful of key indicators which help us determine where a location sits on the Property Clock. These indicators are also important in isolation and we present technical videos, podcasts and articles on these separately on this website. Some key indicators used in determining a location on the Property Clock are: Rental Yield, Stock on Market, Days on Market, Affordability Index, Online Visits per Property, Vacancy Rate, First Homebuyer Activity, and Unemployment.

Check back here at the website regularly for new technical insight explanations on each of the individual property investment indicators.

 

Michael Sier
Director - Performance Property Advisory

With a deep interest and aptitude for analysing data and trends in real estate, Michael is able to present cohesive and comprehensive insights to investors looking to secure financial freedom through property investment and the establishment of a solid real estate portfolio.