Many investors and buyers are obsessed with the idea of timing their property purchase, believing that buying at the bottom of the market for the cheapest price is the key to success.
In fact, this is the wrong strategy to have, as time in the market is far more important than timing the market.
Cycles are a part of everything
Each of Australia’s eight states and territories has its own property market cycle, and then there are cycles within cycles.
Additionally, each cycle varies in length and is affected by a multitude of social and economic factors. The government can changes economic policies and interest rates to lengthen or shorten the cycles.
There is no way to predict how long each cycle will last, as it depends on a number of variables, including economic conditions and human behavior.
A clear reminder of the cyclical nature of housing markets is provided by CoreLogic’s data.
Across the nation’s property index, six distinct cycles of growth and decline have occurred over the past 30 years.
CoreLogic explains that upswings and downturns are characterized by different economic environments and catalysts such as taxation policy, monetary policy decisions, economic shocks, fiscal stimulus, and broader economic conditions.
Although housing values move through cycles of growth and decline, the long-term trend is undeniably upward.
Since July 1992, national dwelling values have increased 382% in Australia, or 5.4% on average in annual compounding terms.
It’s a significant increase.
What investors should consider
Sophisticated property investors understand the importance of buying an investment-grade property in an A-grade location at the time that suits them rather than trying to time the market.
They buy investment-grade properties in good locations because these are the types of properties that will outperform in the market in the long run.
Buying when finance is available is what smart investors do, not when prices are at their lowest or when a downturn appears.
In a downturn like we’re experiencing right now, it can be tempting to wait for prices to drop further with the idea that you’ll get more for your money.
The reality is, investment-grade properties in good locations are stable, and the current state of the cycle is less important if you intend to hold properties for a long time.
Since the value of properties has risen by 5.4% per year over the past three decades, it doesn’t matter when you enter the market.
A key to seeing compound growth is holding the property for a long period of time.
As a result of this strategy, you would also be able to ride out any temporary fluctuations in the market.
In this way, you will have created wealth from your portfolio’s compound equity over decades when it comes time comes to sell down some assets at retirement or whenever it is the right time for you to sell.
Investors who wait for the ‘perfect time’ risk missing out on time in the market, which equates to lost money, or even missing investment grade opportunities.
How about the next property cycle?
Forecasting where housing trends will go next over the short-term is hard enough, let alone over the long-term – 10, 20, or even 30 years.
It’s not a given that property prices will continue to rise at the same rate as they have in the past 30 years across the country.
However, we can learn a few things about the future of the market from the long-term cycles we have seen.
It is predicted that the declining trend will eventually level off, followed by a period of stability and then further growth.
“Analysing each downturn across the combined capitals from the early 1980s shows the longest period of falling values has been 21 months, recorded over the most recent down phase (2017-2019) and also through the 1989-91 downturn,” said Tim Lawless, executive research director at CoreLogic.
“For those that believe housing values double every 10 years, you might need to think again.”
According to Tim, none of the capital cities recorded a doubling of their dwelling values in the past 10 years (the closest is Sydney at 97.6% growth), while Perth and Darwin were the only capitals that doubled in value over the previous decade (2002-2012) with gains of 103.8% and 105.5%.
“For those looking to double the value of their asset over a decade they will need to be outperforming the broader average,”
In a nutshell
It’s important to remember that there are multiple property markets around Australia, and while many are experiencing falling prices right now, other markets continue to grow, or are poised for growth.
Even though timing the market is important in some ways, it is not the key to success in investing.
In other words, you should buy when you can afford to and when you are ready to.