Timing the Property Market Turning Point - May 2020
By Guest Blogger: John Lindeman, Researcher and Educator
John Lindeman explains which signals will identify when we have reached the bottom of the property market and that recovery is on its way.
In all the current uncertainty, it’s good to know that there are some property market indicators that point the way forward and help us time those critical turning points.
To demonstrate how they work, I have used the analogy of a plane flight (remember them?) where the aeroplane is our property market and the passengers are potential buyers and sellers.
The take off
As the plane prepares to take off, everyone on board is looking forward to their destination, enjoying a rest, catching up on some work during the flight or the in-flight entertainment. A few optimists might even be looking forward to the in-flight food.
For the property market, this is when optimism is high - buyers and sellers are keen, with both sales and listings rising.
Even though prices haven’t increased significantly, investors are confident that they will. It could even herald another boom, as last year seemed to promise before the pandemic hit.
The inflight safety demonstration
We’re in the air. Uh oh! Thanks for reminding us that things can go wrong. Now we have to assume the crash position, see how to use oxygen masks and where the emergency exits are.
We are even shown how to don life vests equipped with a light and whistle. It’s not comforting to know that disaster could strike – not comforting at all.
This where the property market is right now – everyone has pulled back, suddenly aware of what might happen. We are in a state of shock, with both sales and listings falling as we brace for the worst, but will it occur, or will we land safely?
Unfortunately, a few flights do end in disaster, and this also sometimes occurs in property markets when demand collapses.
Everyone tries to sell, and no one is buying. In other words, as sales drop, listings rise dramatically. Property prices fall, and many investors are ruined.
Such events are rare in our history and have occurred most recently in towns such as Port Hedland and Moranbah at the end of the mining boom, when prices fell by over 90%.
The safe landing
Luckily, virtually all flights end with a safe and happy landing. The passengers are now excitedly looking forward to their holiday, business meeting, catching up with friends and family, or simply arriving home again.
In the property market, such times herald the start of a real boom. Prices are shooting up and it’s hard to find properties listed for sale because buyers are snapping up properties as soon as they go on the market.
It’s what occurred during the height of the Sydney and Melbourne property market booms of 2001 to 2003 and 2013 to 2018.
Which signals tell us when we have reached the bottom?
The two indicators that show us where any property market is poised are sales and listings. They are both easy to find for any area, with annual sales provided free of charge by major data providers and the number of listings available from either of the two major on-line listings sites.
Because sales indicate the level of demand, while listings reveal the amount of supply, we need to use them together to tell us whether property markets are confident, concerned, crashing or booming and it is their trend over several months which indicates where we are heading:
Where are we now?
We are currently very much at the “concerned” stage, with everyone waiting to see what will happen next. In that regard, it is important to remember that there are around fifteen thousand suburbs and towns in Australia, and they will not all respond in the same way. Some areas are showing real cause for concern, while others will continue to hold up well.
Rental demand has collapsed in short-term business and holiday Airbnb type locations, international student precincts and tourist destinations, many of which in regional areas have also been hit by the drought and bush fires.
Recent first home buyers in areas relying on employment from tourism, accommodation and other such impacted industries could also be in trouble as their debt levels rise and employment prospects remain grim.
However, apart from these instances most homeowners will not be adversely affected, as the property market has always shown great resilience during economic setbacks.
History shows that the only property crashes we have ever experienced have been the result of rash investment in markets driven by speculative price growth instead of a genuine demand for accommodation.
What will happen next?
While our sales and listings indicators tell us, what is likely to happen, they can’t tell us why, or when. To do that, we should look at the dynamics of the current crisis and what changes are needed to create economic recovery and then lead to housing market growth.
Recovery in the worst affected areas will closely follow the progressive ending of the current restrictions on movement and travel. When freedom of movement is allowed in Australia, we can expect a huge revival in property markets reliant of rental demand from day trippers, holiday makers, business trips and students.
In the longer term, our full economic recovery will require an opening of international borders as we experience a huge rise in tourism, international students and migrant arrivals from Europe, Asia and Africa of people seeking the security, safety and opportunities that Australia offers.
After every major international crisis, war or other catastrophe, Australia prospered, and our property markets boomed when our borders were opened. There is no reason to believe that the same won’t occur when this crisis is behind us.
What are the clever property buyers doing?
Smart investors will look to get their finance pre-approved to take advantage of the softer market and good opportunity as they arise. These may be in capital cities, regional areas or tourist towns – it is important to carefully research the long-term property drivers of any areas you choose. When the crisis is over, these markets may offer properties with both positive cash flow and price growth potential for astute buyers.
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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