The Holy Grail - Buying Before a Boom

Isn't that what we all want to do, buy property before the boom hits? But how do you determine exactly when that is going to be?

Your Investment Property wrote a great article on exactly this, comparing a couple of different approaches.

Here is a reprint of the article, you can find the original HERE

Of all the hundreds of property market strategies out there, market timing would have to be one of the most discussed and least understood.

According to Richard Reed, co-author of academic research report Understanding Property Cycles in a Residential Market, there may be good reason for this. He paints a picture of a host of macro and micro economic variables spinning on consecutive and sometimes contradictory cycles and a residential property market plagued by poor information on which to judge them.

“At one point everyone thinks the market is going well but it could have stopped several months ago, so by the time the market information comes through the cycle has well and truly moved on,” Reed says, referring to the time lag for median house price data. “Neither is it across the board; while the market generally can be falling there are some pockets that may continue to rise,” he adds.

Reed suggests investors first look at the market segment in which they are active to determine how susceptible it is to market cycles.

“Premium property is not so affected by cycles, whereas in the mortgage belt, markets can go up and down quite sharply in response to interest rates,” he says, warning that younger investors who have not yet seen a true downturn can tend to overinvest.

Pinpointing the right time to buy
A total cycle tends to last 7–10 years. Reed recommends investors take control of their own long-term forecasting, using infrastructure investments, population shifts, demographic trends and local government planning papers to project the movement of their particular market within a 10–20 year timeframe.

Yet Paul Do, author of I Buy Houses: The Property Investor’s Handbook, says investors can take advantage of growth more quickly by determining the two to four year ‘buying zone’ of each cycle. He uses two basic criteria to determine the buying zone.

The first criteria is based on the share market concept of fundamental analysis and uses rental yields versus interest rates. You buy when yields to interest rates are high compared to historical levels. For example, over a decade the level of rental yields compared to interest rates may swing from 30–60% in a capital city. At 30% the price is expensive and at 60% it is relatively cheap compared to historical levels. For example, in Sydney relative rental yields were at the top of this range for a number of years in the mid-80s and mid-90s and in 2009. 

The second criteria relates to the share market analogy of technical analysis and it is supply relative to demand, so it is best when vacancy rates are at historical lows. When there is short supply relative to demand it signals that prices will increase in the next few years. For example, in Sydney vacancy rates were at their historical lows in the mid-80s and mid-90s and from 2007 onwards.

It pays to wait
Do also recommends waiting until those conditions are right. “My advice would be that if prices have been running strong, wait for them to pull back and start to rise again in the next cycle,” he says.

While investors may find it difficult to sit on their hands, Do says money is best invested elsewhere during the ‘buy nothing’ years. Using the example of Perth heating up while Sydney was cooling down in 2003, Do points out capital city markets are often at different phases at different times, creating ongoing opportunities around the country.

Original Article first published March 12, 2013 Written by Aidan Devine