Many property investors try to pick the “right time” to invest and worry about buying at the “wrong time” in the property cycle. Consequently, they often end up missing out on opportunities, or even stalling their investment decision altogether. So how important is timing the market? And why might it not always be the best approach?
The dangers of timing the market
There’s no denying there are benefits to timing the market well in property – if you’re able to buy at the bottom of the cycle before the “crowd”, and more importantly before prices begin to rise, you’re likely to be in a better position to leverage market improvements. However, this approach can also be inherently problematic. Why? Even for the most experienced of investors, picking the precise bottom of the market is an extremely difficult, if not impossible, task.
Most investors will often wait for signals that a market is moving into the growth stage of its cycle, more often than not in the form of overall price growth. The problem is that these signals are actually historical (or “lagging”) indicators of a market’s performance, meaning that by the time they become visible, the market has often already heated up, and the best opportunities have already passed. Not only this, but investors who spend the time waiting for this growth often then arrive in the market when it’s too late, by which point there’s less stock to choose from and more buyers competing for the same properties. Consequently, they end up paying a higher price and missing out on the very growth they hoped to achieve.
Let’s take a look in practice….
In the period between 2011 and 2015, Perth’s property market experienced strong growth conditions, which led to overall median price rises.
Within this, the median price for the Perth-wide market increased by 8% between March 2012 and March 2014. This meant that buyers who entered the market in 2015, while still purchasing as prices were increasing, ended up paying considerably more in many locations than they would have three years earlier.
These price rises were even steeper than 8% in some tightly held locations, leading to a significant increase in purchase costs for buyers who entered these areas at the later stage. Here are a few examples to demonstrate:
What’s the better approach?
While investing at the “perfect” time in the cycle is great in theory, the time spent out of the market waiting for growth can ultimately prove a lot more detrimental to investors than securing a great property opportunity at a “good time”.
The good news is, we frequently see signs of a market heating up (known as leading indicators) long before we see price growth, often in the form of indicators such as lower stock on market, lower days to sell, and high online property views. By getting into a market that is showing strong future indicators and then holding for the longer term, investors can gain the full benefit of market upswings. While this may not mean purchasing at the precise bottom, this approach can be a lot more favourable than missing out on growth altogether by holding off for too long.
Time in the market more important to long-term returns
While timing a purchase well certainly won’t harm your investment returns, the truth is, this factor becomes far less important for investors who plan on holding their property for the longer-term. This is because, for most investors, their time in the market is a bigger predictor of their success than the market timing of their purchase. Why?
Buying and holding for the longer-term allows investors to leverage the power of compounding capital growth. Let’s say a $500,000 property has an annual growth rate of 5%. After eight years with that growth compounding, that property would be worth $738,728, marking an increase of over 47% on its original value. Now let’s look at the same concept over a fifteen year period – with the additional seven years in market, the property would be worth over $1,039,000. The difference in growth gained from this additional time in the market will typically far outweigh the $30,000 -$50,000 benefit investors might see from timing their purchase perfectly in the short-term.
Of course, property will always be subject to the ebbs and flows of market cycles within this, but if you’re willing and able to wait out those temporary downward swings (and providing you’ve purchased the right asset), history has shown us you should emerge in a stronger position.
Property selection is critical
Of course, even if you do time a purchase when property prices are at their lowest, this becomes irrelevant if you haven’t bought the right asset in the first place. The quality of a property, and the growth prospects of the area in which you buy, can have a far greater influence on your long-term returns than timing a purchase perfectly. Selecting a property that outperforms average growth rates, even by 1 or 2%, can set you ahead considerably in the longer-term. To put this into perspective, a $500,000 property with a Compound Annual Growth Rate (CAGR) of 5% as opposed to 3% would set its owner at a $10,000 advantage in the first year. After ten years, that owner would be looking at $142,000 in additional value!
While property selection influences growth rates during a rising market, it’s equally (if not more) important during challenging markets, which all investors will likely experience in their long-term journey. When property markets are experiencing a contraction in values, the impact is not evenly spread across all segments. Some areas (often where there are high levels of oversupply and less demand from buyers), will see a significant impact on values, and buyers in these suburbs could be waiting years for this loss to be recovered. By contrast, other locations (i.e. areas that tend to be tightly held and in high demand) will be far more resilient, experiencing little price decline, and then recovering much more quickly when the market returns to its growth phase.
Take this example from Perth’s property market- during the most recent downturn, average dwelling values in the Mandurah area declined an additional 17% compared to price movements seen in Perth’s inner suburbs (Core Logic, September 2019). These more resilient inner suburbs, while facing a much lower price fall to recoup, were amongst the first to show early signs of recovery.
This just goes to show that while buying at the right time might be beneficial, buying the right property in a high-quality, investment-grade area can have a far a bigger impact on the long-term performance of your property, and the growth you achieve over time.
When considering when to buy, remember…
- A market will typically show leading indicators long before this translates into price growth.
- Timing a purchase well can be beneficial, but time in the market can have a far greater impact on your long-term property returns.
- Property prices are subject to the ebbs and flows of market cycles, but these short-term fluctuations will have a lesser impact on your eventual returns if you’ve purchased the right property and are holding for the longer-term.
- Timing is irrelevant if you’re not buying the right assets – focus on buying the best property you can in the right area, and you’ll be in a better position to outperform.
How can Momentum Wealth help?
At Momentum Wealth, our buyer’s agents combine years of market experience, refined research methodologies and our stringent purchase criteria to help buyers identify the highest-quality investment opportunities. With over 1200 properties purchased on behalf of our clients and a proven history of outperforming the broader Perth market, we’ve seen first-hand the difference buying the right property in the right area can have on an investor’s long-term returns.
If you would like to find out how we could help you with your next purchase, contact us via our website to organise an obligation-free consultation.