A common debate among property enthusiasts and those of us entrenched in the sector is whether ‘timing’ the market or ‘time in’ the market is more important to an investor’s future success.
On the one hand, some argue that it doesn’t matter when you take the leap, so long as you’re prepared to hang in there for the long haul after selecting an investment grade asset.
Other industry experts however, insist that to get the most return on your investment dollar, you must buy low, then hang on and enjoy the ride as your carefully selected asset traverses a roller coaster of (mostly) dizzying price peaks.
It’s simple logic, according to the argument for this more calculated investment approach. The less you pay at point of purchase, the greater your store of equity will always be.
It can’t be denied that the application of this latter logic has generally proved fruitful for the more seasoned investors among us, those who started their real estate portfolios thirty, twenty, even ten years ago.
Back in those heady pre-GFC days, it wasn’t difficult to track the fairly consistent ups and downs within various property markets over time. This is due to a number of fundamentals that set the foundation for which way the fateful supply and demand balance, or imbalance, teeters at any given moment.
In the last ten years however, market foundations and fundamentals have shifted somewhat radically, as the socio-economic fabric of our world undergoes a global transformation.
Then of course, there’s the more local impact we’re witnessing, as monetary policymakers step off the broken down resources bandwagon, in a bid to prop our economy up on the back of a housing construction boom.
Consider parts of inner Sydney. In recent times, we’ve seen runaway price growth that caused enough concern for APRA to step in, forcing banks to tighten credit application requirements, including a reshuffling of maximum LVRs.
Most of the phenomenal growth across parts of Sydney has been blamed on our ongoing low interest rate environment. Which, by the way, doesn’t look to be changing any time soon.
Obviously, low interest rates have been a major catalyst for the Sydney housing market, which has also been helped along by a lot of enthusiasm from overseas buyers and a coincidental loosening of foreign investment regulations.
Sydney is a great example of why you cannot simply pinpoint a market and wait for it to fall into a lull before you make your move.
Many ‘experts’ would have told you a couple of years ago that there was simply too much hype surrounding pockets of Sydney, particularly to the east, and increased competition meant the likelihood of overcapitalising.
But while you were waiting for that moment in the cycle where activity wanes before making your move, houses in the eastern suburbs posted a 33 per cent rise in asking prices and units a 10.8 per cent increase (SQM Research), over the last 12 months alone.
Herein lies the issue for investors attempting to invest counter-cyclically. Playing the waiting game these days, with so much ongoing, increased activity in prime investment markets, could mean you end up over-capitalising anyway.
What’s more, if you delay your next investment purchase in the hope that markets will cool further and you’ll find that elusive bargain, the odds of securing sufficient capital to make your purchase when you’re finally ready, could be stacked against you.
Making money less obtainable
Last month’s cut to interest rates caused alarm bells among analysts who have been paying particular attention to Sydney’s real estate sector, with a notable surge in auction clearance rates and values across August.
According to the CoreLogic August Home Value Index, year on year prices rose by an average 9.4 per cent, with a strong 1.3 per cent gain for the month.
CoreLogic head of research Tim Lawless said, “(The) RBA had a grand plan early in the piece and we have gone through a very smooth transition from mining to building boom. It has seen value growth stronger than what people have anticipated…a longer cycle.
“This is the really difficult situation…the household income to dwelling price ratio was, 8.4 in Sydney and 7.2 in Melbourne, compared to 5.7 in Brisbane…you will start seeing social issues as people are being blocked out of the market.”
Although Lawless suggests Sydney could be on the precipice of a genuine slowdown, with the annual growth rate halving from a recent 18.4 per cent peak to the current annual rate of 9.4 per cent, he fears further rate cuts could see yet another counter-cyclical price surge.
“If I am wrong about that,” he says, “And see the interest rates continue to propel 1 per cent growth in house prices each month, there could be social fallouts, and negative consequences.”
Louis Christopher of SQM Research says if housing markets continue to demonstrate atypical behaviour, with further runaway price growth, APRA may be forced to intervene further.
“The odds are they will get banks to be more reinvigorating with LVRs,” he said. “Perhaps we need lower LVRs in the eastern suburbs.”
Of course for investors, this could mean when you’re finally ready and able to invest in a prime location, lenders may want to see more capital than what you have up your sleeve.
Another reason to reconsider whether timing is more important to your investment strategy than securing an asset today.
While market timing can have its drawbacks, there’s no denying some areas will provide better, more affordable alternatives at different stages.
Lawless says falling house prices in Perth and Darwin, where dwelling values dropped by 4.2 per cent over the 12 months to August, are perfect examples of cyclical opportunity.
“They are buyers’ markets. Buyers who are looking for a long term commitment, there could be opportunities there.”
Again however, the disclaimer is that you always want to find investment grade properties when building a portfolio of high growth assets. Otherwise, you’re buying a bargain for the sake of buying a bargain. And that’s not what investing is about.
There are also various opportunities that could conceivably present themselves to savvy entrepreneurs of the future, around social housing initiatives in inner city areas where accommodation supply needs to be rebalanced to provide affordable access across all demographics.
When you’re ready
Ultimately, when you buy should be more about your own investment strategy and personal circumstances than getting the timing just right. The truth is, at any stage of the game, there’s a perfect property for your portfolio, just waiting for you to acquire it at a fair and reasonable price.
Above all, you need to make sure you have ready access to the necessary capital and can afford to make the commitment to service further property debt.
If you would like to crunch some numbers and determine whether you might be ready and able to snap up another prime piece of real estate for your investment portfolio, why not connect with the Trilogy Funding team?
Click here now to arrange a confidential assessment of your financial position and leverage our years of collective industry knowledge to your advantage. Don’t wait for the right time. Because the right time is now!