How to pick the property market turning point

Expert Advice with Michael Yardney.

Are we there yet?

It’s amazing how the messages in the media have changed in recent times.

Not that long ago they were telling us property prices would fall significantly more, with some property pessimists suggesting we could see a peak to trough decrease in home values of over 20 percent.

Today the common theme is that the property market will turn later this year or early next year, with many asking “have we reached the market bottom yet?”

But as they say – no one rings a bell when we reach the bottom, so how do you pick the turning point in the property market?

Well…my suggestion is not to even try and pick the bottom, because even the smartest economists armed with all the data can’t do that.

Instead, if you’re a home buyer or property investor and you have your finance organised, now is an ideal time to purchase your next property countercyclically knowing your downside is minimised and your upside is maximised.

However, here are some of indicators the research team at Metropole watch carefully looking for a signal that the market could be turning.

The economic fundamentals.

Our property market doesn’t work in isolation, so we keep an eye on the macro economic factors such as the world economy and Australia’s economy.

We monitor GDP, inflation and wages growth all of which are likely to remain below long-term trends over the next few years. At the same time, we’re keeping a watchful eye on unemployment levels which are creeping up.

Finance

Recognising that our property markets are driven by the availability of credit we keep track of the ABS data on credit growth which is a leading indicator, turning positive before the markets do.

Currently APRA’s relaxed borrowing requirements plus the prospects of even lower interest rates are positive signs for property.   

At the same time many Australians will have a little more cash in their pockets with tax refunds. That plus the beginnings of wages growth in some sectors will help serviceability of loans.

Market Sentiment

Increased consumer and business sentiment point to good times ahead. The cloud of uncertainty that hung over home owners and investors leading up to the Federal Election made both home buyers and sellers go on strike. But boy has market sentiment and buyers confidence changed since then.

Supply and demand

Australia’s population is growing faster than any other developed country, and this fuels demand for property.

Sure we have an oversupply of apartments in some locations, but we’re slowly work through this. With building approvals for future developments falling as developers have difficulty financing new projects, we will soon fall into an undersupply situation – but that’s just the way the property cycle works.

Some of the metrics we follow

To keep an eye on the state of our property markets we track the following:

Housing credit growth – this leading indicator will turn up as home buyers and investor apply for loans before they purchase their next property.

Google Searches – ANZ Bank has found that interest in property as measured by real estate searches on the internet is a good forward indicator of things to come.

Days on market and Vendor discounting – As buyers return properties will sell more quickly and sellers will not have to offer large incentives to sell their homes. These metrics turn before prices start to rise.

As our markets pick up the transaction numbers (number of properties sold) and the number of new properties listed for sale will increase as buyers and sellers who have been sitting on the sidelines return.

Rather than waiting for reports of rising median selling prices, which only come to light months after the market has turned, we keep track of Asking Prices which are an accurate real time indicator of what’s happening in the market and closely track eventual selling prices.

And of course auction clearance rates are a good indicator of confidence, particularly in Melbourne and Sydney

The best time in a decade

For many investors now is a great time to make a countercyclical purchase in Sydney or Melbourne or to ride the property wave in Brisbane.

All the fundamentals point to good times are ahead for our property markets.

Rather than trying to be smart and pick the bottom of the market which, after all, is only one day, or one week, or one month; now is the right time for long term investors to buy investment grade properties while they are still "on sale."

That way you'll look really smart in 10 years’ time when you look back and say: "Gee that property was a good buy - look how much it has increased in value!"

There hasn't really been as good a time to buy counter cyclically for over a decade.

I know those clients of Metropole who made sound investment decisions 10 years ago at the end of the Global Financial Crisis are looking back and  feeling pretty smug with themselves.

In fact, we haven’t seen values in Melbourne and Sydney fall to the extend they have since the “recession we had to have” in the early 1990’s, so arguably this is the best counter cyclical opportunity to buy property for almost 30 years.

But be careful – our property markets will remain fragmented and not all properties will make good investments. As always correct property selection will be critical.

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Michael Yardney is CEO of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.

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