By Guest Blogger: John Lindeman, CEO
As price growth continues in our property markets, property market expert John Lindeman gives us his take how investors can secure the greatest benefits.
Warren Buffet had just two rules for investors. The first rule was Never lose money and the second was Never forget the first rule.
It would seem that getting into a growth market is the best way to avoid losing money, and in fact many investors do just that, by holding off buying properties until they are sure that prices are rising.
In response to this strategy, almost all the blogs, articles and free reports out there talk about “best performers” and “hotspots” which reveal areas where price growth has already started.
There’s an issue with buying in growth markets
The issue is that property market performance in a city, region or even a suburb moves in a recurring cycle of growth and decline, as the picture shows.
When we are in a growth phase such as the current one, it’s critical to know how long prices are likely to keep rising. Are we just at the beginning, with more good growth to come, or are we already near the end? This is because sooner or later, prices will become unaffordable, or current buyer demand will be met and growth will end.
When growth ends, markets go into decline and eventually bottom out, sometimes for years, before demand grows again. It’s those investors who enter a market when prices are about to increase who make the most money.
On the other hand, it’s usually the last buyers to enter a market before prices peak that stand to lose, because they have purchased just before the declines set in.
So how do you know that the market where you intend to purchase an investment property has plenty of growth potential left in the tank? The answer to this is not measured by the length of time that price growth has been occurring, nor is it indicated by the amount of growth that has taken place. The answer is revealed by the types of buyers creating the demand.
Different types of buyers create different types of demand
Property buyers come in different groups, such as first home buyers, upgraders, downsizers and investors. Each of these has different motives and limits when it comes to buying property, so if we know which group is doing most of the buying, we can estimate when the growth is likely to end. And if we correctly forecast which group is likely to be next, we can buy just before the growth really kicks in.
Investors for example, are motivated only by profit. They enter markets when prices are rising and the more that prices rise, the more investors want to buy. On the other hand, owner-occupiers are motivated by affordability. They enter markets when borrowing conditions are easy and finance costs are low. The more that prices rise, the fewer can afford to buy until new affordability ceilings have been reached and demand stops.
So who’s leading the buyer demand charge right now?
The graph shows that the percentage of investors buying property right now is less than a quarter of the total, and is falling. Demand is coming from owner-occupiers, with good growth occurring in typical first home buyer suburbs and is now starting to extend to more established suburbs as upgraders join them.
Where to wait and where to jump in
As new affordability ceilings are reached, growth in first home buyer suburbs will slow down but it is highly likely that demand will then ripple to more affluent areas as moving, improving upgraders take advantage of the emerging market conditions. Suburbs in well-established sought after locations are highly likely to be next to rise in price.
Investors can take advantage of this trend by buying well-appointed, low maintenance properties in locations with excellent transport, recreational and retail services. Then they can sit back and watch the price surge occur, taking note of Warren Buffet’s first rule of investment Never lose money.
John Lindeman is the In-Depth columnist for Your Investment Property Magazine and a popular contributor to property related media. John also authored the landmark best-selling books for property investors, Mastering the Australian Housing Market and Unlocking the Property Market, both published by Wileys. Visit www.lindemanreports.com.au
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