Who are the drivers of property booms and busts?

By Brett Warren | 30 Jul 2021

As a property investor have you considered who may be the driver of a property boom or property bust?

Have you considered why this may be important to understand?

For starters, you don’t want to buy something that could lose significant value.

So, it may be beneficial for you to understand the drivers at play and lower the risks for your next investment.

Conversely, it would also be beneficial to understand the drivers of a property boom.

A location where you could allocate your resource and that will outperform the averages and give you wealth producing rates of return.

There are two different types of drivers in our property market – Home Buyers and Investors.

Here are my thoughts and how you can capitalise.

Property Booms

So, who are the drivers of our property booms?

Let’s take a closer look at each of the buyer demographics in more detail to understand their motivation and buying habits.

A saying I have developed after decades of investing for myself and buying for others is,

“Home Buyers buy with their heart, while investors buy with their calculators”

From my experience, it’s the Home Buyers that are the drivers of property booms.

It really comes down to one reason – emotion.

The Home Buyer will think nothing of paying $50,000 or even $100,000 more for a property they fall in love with.

They know this may be their forever home, it is a great neighbourhood, it may be close to the best school and they simply have to have it!

An Investor just won’t do that, their calculator will not allow them to.

The facts and figures will never justify them overpaying by such a large amount.

Add in a shortage of stock, FOMO and a dozen or more emotional Home Buyers for very single property, who have been searching and missing out for months and, well – BOOM!

Property Busts

Property busts are the reverse of property booms.

They are areas and locations where prices go into freefall and can drop upwards of 20% to 30%.

The most obvious examples of a property bust in recent times, were the mining towns over the last decade.

This was predominantly driven by Investors.

Investors generally take a very short-term outlook and when a market starts to drop, they instantly sell up and pull their money out.

The share market is a good example of this, but it also happens with property.

On the other hand, owner occupiers are longer-term thinkers, they see themselves in their home potentially for a decade or more.

When there is a downturn, they won’t simply sell their home – in fact they’re incredibly resilient.

They would rather eat noodles for 6 months or sell a car to keep a roof over their family’s head than sell the family home.

Sure prices in areas dominated by home owners often retract, but this emotion will stop prices going into a downward spiral.

Here’s how to capitalise on this

Probably the most obvious lesson here is that I want to invest my money in a predominantly owner-occupied market.

Property prices will generally rise more in these locations and there is a lower risk of prices free falling.

As a property professional, this is one of our first considerations, finding and area that is established and has a good owner occupier percentage.

One of the tools you can use is the Domain - Suburb Profile.

It can be used to give you a quick snapshot of a suburb and the makeup.

The second lesson may not be so obvious, in that you need to understand that not all Home Buyers / Owner Occupiers are equal.

I have written before why I believe that income and wages growth is one of the most important pieces of data you need to understand.

For around 90% of the population, wages growth is minimal at present, with incomes barely tracking very low inflation.

As a result, they find themselves living from paycheck to paycheck and with very low rates of savings.

The other 10% have higher incomes, multiple streams of income and as a result higher rates of savings.

It is this type of demographic we want to target as it adds an additional layer of security for investors.

They can and do pay more for property, for longer and when a downturn comes, they can ride it out with higher savings and financial buffers.

Conclusion

A property boom and a property bust are part and parcel of every property cycle.

By understanding the drivers of each stage of the cycle, it can put you in a superior position as a property investor.

Target emotional Home Buyers with higher incomes and therefor superior financial buffers.

The booms will be larger and run for longer as they have greater resources to draw upon.

It is the same in a downturn, they can ride it out, are incredibly resilient and will do whatever it takes to keep the family home.

Investors buy with their calculator and are usually much shorter-term thinkers.

They will not overpay substantially and will think nothing of pulling their money out of a falling market, leading to bigger busts.

Learn the lessons and put them into practice to set your portfolio up for longer term, wealth producing rates of return.

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Brett Warren is a director of Metropole Properties in Brisbane and uses his 18 plus years property investment experience and economics education to advise clients how to build their portfolios.
He is a regular commentator for Michael Yardney's Property Update.



Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.

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