Expert Advice: by Ian Hosking Richards
Whilst I believe most investors are aware that property cycles exist and have a basic understanding of the various stages of a typical property cycle, many investors seem to totally disregard the concept when making an investment decision. Not only do they fail to capitalise on a knowledge of property cycles in order to fast track their portfolios, many seem to do exactly the opposite of what common sense should be telling them to do.
So what does the typical property cycle look like? I believe that it is best analysed by dividing it into four distinct phases.
The value/opportunity phase
This is the beginning of the cycle and the best time to jump in to the market for maximum gain. Prices start to rise slowly and the pace of the market gradually increases. However, many novice investors miss this opportunity because they fail to spot this phase of the cycle, particularly in the early stages of market recovery.
The growth/boom phase
At this stage in the property cycle investors are getting more confident because they can actually see prices increasing. As this phase gathers momentum more and more investors enter the market, encouraged by rising prices and positive market sentiment.
The peak phase
At the peak of the market investors are still piling in to the market, fuelled by continued buoyancy in the market and caught up in the feeding frenzy. Having sat on the sidelines and waited and watched while other investors made money, the more inexperienced and timid investors now enter the market, simply grabbing anything so as not to miss out on the assumption that the market will continue to perform well. Whilst this is a very active phase in the cycle for investors it is by far the most dangerous as the overheated market can end very abruptly as sentiment suddenly turns from euphoria back to reality.
The correction phase
This is the stage where buyer’s remorse kicks in, particularly for those who jumped in at the peak of the market. Values are likely to drop and may remain subdued for some time, perhaps years. For many of those investors who jumped in to the market impulsively at the peak, they often compound their mistake by selling, often near to the end of the correction phase, just when the cycle is about to start all over again.
Hindsight can be defined as the ability to see, after the event, what should have been done. This would be a valuable gift indeed for the average property investor. However, in the absence of such a gift common sense would be a good substitute. An understanding of what drives property markets and an acknowledgement of which phase of the cycle a particular area is likely to be in is a much sounder approach than simply following the crowd.
An understanding of property cycles is an essential tool for the property investor. The various stages of the property cycle seem to give off signals that may lead inexperienced investors to act emotionally and make poor decisions. Many novice investors are seduced by long periods of sustained growth and frenzied market activity. They do not see the value in areas that have had slow or no growth for a while.
Yet buoyant markets will not continue to outperform the market average indefinitely and slow markets will in time become under-valued: as long as the key drivers are present they make a much more compelling story.
I would like to end with a quote from one of the world’s greatest investors, Warren Buffett: “Show courage when others show fear, show fear when others show courage”. This is particularly true when applied to the property market, and observance of this fundamental guideline should ensure that investors make more measured investment decisions free of the emotion that often leads the novice investor astray.
Ian Hosking Richards is a successful property investor with a portfolio of over 30 properties. He is the CEO and founder of Rocket Property Group, a leading independent real estate agency that helps hundreds of people each year enter the property market or grow their existing portfolios.
For further information or assistance, please visit www.rocketpropertygroup.com.au or call 1300 850 038.
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