How to predict a market boom

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Many of us buy lottery tickets, and while we don’t know who will win, we do know that someone must – and that lucky person could be us. The concept of luck also occurs in the property market; many believe that investors who make quick and huge fortunes from property are just plain lucky.

While waiting for an area to ‘boom’ may remove one risk, it introduces even more dangerous ones. For example, the boom could be about to end and recent buyers may discover that they have paid way over market value in suburbs where prices are falling and no one wants to buy.

Knowing the causes of booms empowers us to predict the effects. If we know with some certainty what causes property market booms, busts and slumps to occur, then we can invest with confi dence in areas that are about to boom and easily avoid those suburbs where prices are about to crash.

The good news is that we can confidently make such predictions about the effects if we know what causes them to happen in the fi rst place. There are some types of events that can lead to dramatic changes in prices and rents. The first are natural events, such as droughts or fl oods, and the second are market-driven events, such as a retiree-led boom.

Each of these events leads to predictable changes in local prices and rents, so by knowing when and where they are occurring, we can identify the location, intensity and duration of the price and rent changes that will result. Let’s look at each of these in turn and see how we can predict the unpredictable.

Natural events and their impact on property
While earthquakes and tsunamis are rare in Australia, and we don’t have any active volcanoes, nature occasionally hits our housing markets in other ways. Cyclones, floods, bushfires and long-lasting droughts can set local housing markets back for years, but such housing markets eventually bounce back – and when they do, prices quickly catch up to where they would have been had the event not occurred.

This usually means that prices shoot up quickly, and many experts misinterpret such events as booms. They are actually bouncebacks, and once the price catch-up has taken place, local housing prices will tend to move in accordance with the broader market. However, knowing when and where such dramatic price catch-ups can occur enables investors to participate in their recovery and seemingly predict the unpredictable.


The graph above shows the number of years that it typically takes for housing markets to bounce back from various types of natural disasters, and you can see that while markets usually recover quickly from cyclones, it takes many more years for them to recover from other tragic events, such as droughts and bushfires. Let’s look at the impact each of these events has on property markets to find out why they take different periods of time to recover. 

Cyclones form in the monsoonal trough north of Australia between December and April, with an average of 10 cyclones hitting the Australian coast each year. Luckily, most of these avoid major populated areas and their impact is usually limited to crop damage and transport disruptions. Our most severe recent cyclone was Yasi, which hit the north Queensland coast and caused widespread damage to coastal towns such as Innisfail, Mission Beach and Cardwell.

Yet, as Figure 1 shows, house prices in these towns all recovered within two years. This was because building codes in high-risk areas are stringent, and houses are built to withstand all but the most intense cyclonic activity. Although there was severe damage to crops and vegetation, property prices tended to quickly bounce back.

Floods occur every few years in some of our coastal cities, such as Rockhampton, where they have little effect on housing markets, because, if not welcomed, they are largely anticipated.

The effect these ‘periodic floods’ have on local housing market prices is shown in Figure 1, and the reason that housing prices only fall slightly and then recover within a few years is that river levels are monitored and warning systems put in place to protect lives and minimise stock and property losses.

Flood damage does not usually result in building losses, as dwellings are constructed both to withstand flood surges and minimise water damage. When the waters have subsided and the clean-up is completed, the housing market quickly returns to normal.

Bouncebacks many years later
Unexpected floods can result in total property losses and even tragic loss of life. Figure 1 shows how property prices fell in the flooded suburbs of Brisbane after the disastrous flood of January 2011. Housing demand then languished for many years until the trauma associated with that tragedy was gradually replaced by more recent and pleasant memories. Since then, housing prices in Brisbane’s worst-affected suburbs such as Coorparoo, Indooroopilly, St Lucia, Rocklea and Yeronga have risen dramatically at more than double the rate of growth experienced by Brisbane’s house market as a whole.

The recent floods in Townsville are likely to impact housing prices in the affected suburbs in the same way, as the severity and extent of the flooding was unexpected. It will take several years before the damage and trauma associated with such terrible personal loss can heal, but eventually we can be sure that the time for housing market recovery will arrive and that housing prices will then quickly climb back to where they would have been had the floods not occurred.

Droughts impact many regional cities and rural towns in Australia, and the way they affect housing markets provides another valuable lesson for investors. During the millennium drought, for example, a slow but steady fall in house prices commenced in the Riverland, Riverina and Murray/Goulburn regions. Figure 1 shows the collective decline in house prices that occurred in these locations and demonstrates that, as long as droughts continue, price falls can be prolonged and severe.

Just as it takes several years for economic conditions to deteriorate during a drought, it then takes several years after the drought ends before local housing markets return to growth, but when the bounceback occurs it can cause a quick catch-up of housing prices as prosperity returns. Such a bounceback effect took place in all the regions mentioned above, with prices doubling in one to two years as local economies boomed once again.

We are currently experiencing severe drought in much of NSW, central Australia and southern WA, and in much of Queensland until the recent floods occurred. The depressingly familiar pattern of slow economic decline and falling populations in regional towns is taking place. A recovery in local housing markets will start a few years after the drought conditions end, and we can look forward to a quick bounceback in housing prices.

Perhaps the greatest and most feared danger to homes and their occupants comes from bushfires because of their destructive fury, devastating whole communities lying in their path. Figure 1 shows the effect that the horrific series of fires associated with Black Saturday in 2009 had on property markets in the worst-hit towns, such as Marysville, Blackwood, Gembrook, Kinglake, Mount Macedon and Daylesford.

House prices fell quickly and dramatically in the affected areas, with some towns such as Marysville being virtually obliterated. Housing demand remained minimal until the towns were rebuilt and the residents fully recovered, and as you can imagine this takes many years. But then, as the forests returned to their natural beauty and the confidence of homebuyers returned, house prices doubled in these locations within a few short years.

Although it is possible to participate in the recovery of the housing markets in such devastated areas by buying property just before demand is about to rise dramatically, some of us may not feel motivated to invest in such areas at all. It is good to know that we can also predict the unpredictable by investing in areas where price growth is a market-driven event.

Market-driven events lead to predictable price booms
The doubling of property prices in Sydney and Melbourne over the last 10 years has given many potential retirees the opportunity to downsize by selling the family home and buying a house on the coast or in the hinterland where prices are much lower. 

This not only offers them a desirable lifestyle but presents them with a retirement nest egg. If the demand from retirees is large enough, it can lead to a price boom in the most popular retirement locations, and this effect is quite predictable.

I have shown how this effect works in Figure 2 (below) by comparing the median price of a house in Sydney to one in Byron Bay from the early ’60s to the present time.

Byron Bay has an ideal climate for retirees, is one of most pictureperfect locations on Australia’s east coast, and has many local attractions, such as a thriving leisure and entertainment industry, folk, jazz, blues and alternative festivals, plus all the facilities that older people seek. 

Retirees first discovered Byron Bay during the ’60s, and this caused a massive price boom that continued until the early ’70s, when the median price of a house in Byron Bay had increased to be about the same as for a house in Sydney. Price growth then stopped, because retirees could no longer afford to buy there.

Over the next few years, prices in Byron Bay fell by comparison to Sydney’s prices, because all those retirees were passing away and their homes were being sold by the children and grandchildren who inherited them. By the early ’80s, house prices in Byron Bay were back to half of those in Sydney, and there were few retirees living in Byron Bay.

Then exactly the same thing happened again, as a new generation of retirees discovered the beauty, attractions and affordability of Byron Bay as a retirement haven. The house price rose until it was about the same as Sydney’s in the early ’90s, and then once again, as the older residents passed away, over the next few years the same comparative fall in house prices occurred again.

In the new millennium another generation of retirees discovered Byron Bay, and prices since then have risen dramatically compared to Sydney’s. Even though Sydney’s median house price has doubled in the last 10 years, Byron Bay’s house price has risen by 25% more than in the last five years alone.

I call this the ‘Byron Bay Effect’, and it tells us that now is probably not a good time to buy an investment property in Byron Bay. Make a note, though, because in a few years’ time, when the median price of a house there is once again about half the cost of a house in Sydney, it may well be the right time to buy.

This example shows us that the intensity of such marketdriven booms can be forecast, as can their start, duration and end. There’s more than enough information available to enable us to accurately predict the unpredictable caused by both natural and market-driven events, if we know how to use it.


John Lindeman

is a property market author, educator and commentator, and director of Property Power Partners

 

 

Top Suburbs : dulwich hill , north epping , newcastle , woolloongabba , menai

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