Housing prices are volatile and the media loves to latch onto any changes with big headlines. They want to scare us into believing that there is an impending housing bubble, that the market will slow down, that the market will fall or some other painful outcome. However, one set of numbers doesn’t tell a story.
How do we tell the story?
Rather than looking at isolated numbers we need to look at the trends in the information. The rule in share trading is that the trend is our friend, a simple but useful statement. Trends tell us that if the current circumstances continue we will get more of the same results.
Experienced property investors want to know when the trend is going to go up, or go down. If demand for housing goes up rapidly we usually experience strong capital growth. This is a very useful outcome to increase our net wealth and reduce our risks from borrowing to invest.
If demand is about to go down rapidly we can factor this into our strategy. If we can assess the length of the down turn, we can be further informed. If we are going to retire in five years we might hold our property, if we are retiring in one year we might sell it now to retire debt on other properties.
Many of us have a real estate view of the trends. We are studying actual history and projecting it into the future. This sector looks at auction clearance rates, vacancy rates, and price growth to tell their story.
Vacancy rates are a measure of demand to live in an area. In Sydney the vacancy rates have been steady at 2.2% for several years, in Melbourne they are trending down and are currently at 1.5%. This is anticipated to put pressure on rents to increase in Melbourne. Both markets show peaks of vacancy rates in December and January as families don’t move over Christmas and the summer holidays.
Auction rates tell us a lot about demand and supply. In Melbourne they are trending down from over 80% to 74% and in Sydney trending down to 72%. While both trends are downward they are still very high compared to historical trends. Capital growth continues in both markets however it is time to watch more closely.
What do we need to watch more closely?
Our job as property investors is to know the trend and have a helicopter view of all the disrupters. These are usually based in economic indicators. Disrupters that drive trends up include increasing population growth, increasing economic growth, and increasing confidence. Disrupters that drive trends down include increased unemployment, increased tightening of finance and increased road congestion.
The banks are currently tightening their rules for borrowing, increasing the hurdles to service loans and increasing interest rates. These are disrupters of the trend as fewer people will qualify to borrow and this will slow demand for property.
However, this change needs to be balance against demand from increasing population growth. If we have strong population growth the impact of the tightening of finance will be outset against this demand. Population growth is trending up strongly in both cities with Melbourne growing faster.
Both Melbourne and Sydney have strong economic growth that is unpinned by huge investments into infrastructure. Infrastructure can change the accessibility of an area ‘instantly’. If we take 10 or 20minutes from a car trip, the affected properties are perceived as more valuable. It is as if they just moved five or ten kilometres closer to the CBD.
Sydney is well on the way to delivering METRO stage 1 in 2019. This rapid transport system will take passengers from the north western suburbs into the city with trains at 4 minute intervals. Prices in the northwest exploded with the announcement of this investment several years ago.
Melbourne has just announced a second Maribyrnong River crossing and freeway that will increase the accessibility of the western suburbs into the city and the port areas. The Westgate Bridge crossing is a tough commute in the mornings. This new infrastructure is likely to increases property prices in affected areas.
How can we have gain greater insights into the disrupters of the trend?
Government policy is the fastest change to disrupters. Wouldn’t it be useful to know the migration policy of the Federal Government so we would have a further insight into population growth and the story of demand for property? Are they still plan to bring in 350,000 people, just like last year? Then we can view the recent visa changes as different doors being open rather than doors closing.
The media often sells fear of changes in the trend, just like property spruikers who sell the sizzle. A well constructed strategy is not about fear; it is about risk management. Know the trends, know the disrupters, or buy professional advice.