Property Buyers and Timing the Market
Property buyers timing the market
Australians have a well-documented obsession with real estate. At last count, according to property data experts CoreLogic, we have more than $6 trillion tied up in residential real estate. It is our greatest source of personal wealth as property buyers. We understand property and for many of us a popular topic around the Saturday barbecue is timing the market. When is the right time to buy?
Over the past two decades, Brisbane house prices have grown consistently and steadily. Yes, there is a property cycle within that long-term graph, where prices rise and fall, but that is only a concern if you’re planning to buy and sell within one cycle. A cycle lasts about 10 to 12 years on current numbers, depending on the geographic region.
But that sort of trading reminds me of stock market horror stories where roller coaster price fluctuations bring a world of pain for the riders.
What is timing the market and what it means for property buyers?
Buy low, sell high – a mantra for slick suited hedge fund managers throughout the ages.
Smart property investing is different. Property buyers mistakenly interpret ‘Buy low, sell high’ as chasing the lowest price point to buy and the highest point to sell.
They try to ‘time’ their entries and exits to acquire an asset when it swings down to its cheapest, and then offload it later at its peak for maximum profit.
While this approach has all the thrills of walking across Niagara Falls on a tightrope in a chicken suit, property speculators are doomed to failure.
Markets are certainly cyclical, but there have been countless opportunities lost by those waiting for the bottom of a cycle. The lull just isn’t that defined, and the opportunity cost of not acting has seen many potential property buyers look back in anger.
That lost time is costing you money too. The yield on Brisbane residential property is about 3.5 percent, so every year you wait for a lower entry point you are missing out on rent.
The same can be said of trying to pick the peak for selling out. By the time most commentators are calling a market that’s tipped over the edge into softening, the slowdown has been well and truly entrenched for months.
In addition, the next cycle will almost certainly see a new price high exceeding the old one.
Further to all this, is that the buy-in and buy out costs of trading property can be astronomical. Not only is there agents fees and stamp duty, but the ATO has a few rules that can substantially eat into your newly acquired capital gains.
Leave speculating to the bookies.
The market’s in charge. Don’t try and tell the market what it should be doing.
“Prices are high and should come down, so I’ll wait to buy when they’re cheaper
“Values have run up strongly and should not go up any further so I’ll sell out now”.
Here’s something to remember – the property market is too busy growing people’s wealth over the long-term to take any notice of what you think it should do.
You’ll only spot the top or the bottom by looking in the rearview mirror. Ask any experienced property buyer and they’ll tell you the bottom of the market has been met when prices start to rise. By then, it’s too late. If it was easy, we’d all be property billionaires with a taste for Beluga caviar
Speaking of billionaires, a legitimate one whose often quoted is Warren Buffett. He said, “You’d be making a terrible mistake if you stay out of a game you think is going to be very good over time because you think you can pick a better time to enter,” said the Oracle of Omaha who, incidentally, employs 41,000 real estate agents in the US via his HomeServices of America subsidiary.
Australian price movements
Australian housing prices have soared a staggering 6556 percent since the early 1960s — an average rise of 8.1 percent (nominal) a year, the Bank of International Settlements (BIS) reported in 2017.
The Switzerland-based BIS analysed long-run trends in house prices across 47 countries, including Australia. It found upswings had been far more common than downswings across the 47 countries, accounting for nearly 80 percent of the periods studied in advanced economies. The long-term rise in Australian housing was the most persistent of all.
“The upswings lasted on average 13 years; with the longest one, in Australia, still continuing after half a century,” the BIS reported.
“By contrast, downswings accounted for only 8 percent of the advanced economy sample; they lasted on average five years.”
Brisbane and Gold Coast
Looking at long-term house and unit price growth trends for Brisbane and the Gold Coast (see graphs), you can see that if you buy and hold (the only really sound property investment strategy) for more than a decade, no matter which year you bought property, your investment grew.
So, in a nutshell, house prices spend a lot more time going up than down. In Australia, you could have bought at the top of any of those previous upswings and, if you held for the long-term, you’d still be miles in front. So much for timing the market.
Which means, given a long-term investment mindset, the best time to buy residential property is … whenever you can afford to.
Now you’re free from worrying about the ‘when’, you can focus on the ‘where’ and ‘what’ to buy. This is how you can really build your wealth through property investing. Because the time to buy is always now.