There are a number of different economic forces at play that determines the timing of the market and whether it is a good/bad time to buy/sell. Knowing where you’re at in the property cycle at any given time can give you much-needed guidance for large property decisions. If you time it right, you can make the most out of your sale, or snap up a bargain purchase!
The first thing to understand is that there are two main points in the property market; undersupply and oversupply. If you think of it like a clock, these are 12 o’clock and 6 o’clock. All other times in the market are either leading up to, or coming out of one of these.
Undersupply is a gold mine for those looking to sell. This is the point in the market where there is such high demand for rentals and buyers that the number of available properties just does not measure up. You’ll observe landlords increasing their rental prices and have no trouble finding tenants willing to pay it. This rental increase will then have an impact on investors looking at getting into the market. They see the high rental returns as the perfect time to make their own purchase and start cashing in on the increased demand for properties. If you list your property during this period, you’ll experience much higher sale prices as there are so many buyers out there competing against one another with their the bids.
So what causes such an undersupply of properties to occur? There are a number of factors that play a crucial role, including large immigration numbers and a sudden increase in population growth. The construction cycle also plays a large role, as when new construction is limited, undersupply worsens. When the economy is strong, people are getting pay rises and more regular, secure work, which gives them more confidence when it comes to borrowing a larger amount to invest. The share market also has a role to play – when stock prices are unstable or falling, people with their money in shares tend to switch to property as it’s the safer choice at the time.
You can see where this all ends up, right? With more and more buyers in the market, competition gets fiercer and the only solution is to pay higher prices to secure your investment. Undersupply might be a seller’s dream, but it’s a buyer’s nightmare…
With so many people trying to enter the market and buy, things can get pretty full on pretty fast. Developers will start to want to get in on the action and build new projects that will sell for high prices – not to mention investors who have just sold up and are now looking to trade up to their next home! This will lead to new construction getting underway to help meet the increased demand.
Eventually, the number of new properties will start to catch up with the demand. Unfortunately, a lot of buyers will be priced out of the market. No matter how secure their job, or how optimistic they are about getting a loan, reality is they just can’t make finances meet. Tenants will also eventually start saying no to increased rental prices as they cannot afford it, and we’ll see the market ease back a bit. Landlords will have to start thinking about lowering their prices as there are no longer tenants left who can afford the increases.
This stage of the market cycle is what you might like to refer to as ‘an afternoon nap’. Everything has been go, go, go leading up to this, and now it’s exhausted and starts to slow down. The heat of the market and high prices have become too much for buyers, and those who haven’t already bought in are starting to lose confidence.
This is where we start to see things really switch over in the market. Sellers begin to slowly lower their prices, but are still not getting many bites as buyers have figured out if they hold out long enough, they’ll force the sellers to go lower. This period of time is where the number of properties and the number of buyers begin evening out.
Unfortunately for the sellers and developers, the cycle is starting to turn, and there are now more properties available than there are buyers looking. This period in the cycle can often match up with harder economic times and the backlash to higher interest rates. The rush and excitement has worn off, and now buyers are losing confidence in their borrowing ability and even their jobs.
For sellers, this is the worst possible time to consider putting your house on the market. Not only are there going to be very few buyers out there, but their offers are going to be considerably lower than you might expect.
Where sellers had their goldmine back in undersupply, buyers are now the ones in the spotlight. This is their time to shine! With lots of properties on the market and very few other buyers to compete with, this is where you’re most likely to snag a bargain. Likewise, landlords are going to be forced to lower their rents, perfect for new tenants to snatch up a great property at a lowered rate.
Eventually, we’ll get to the point where property prices have gotten so low, people are refusing to sell. All those new developments are sitting there half empty and struggling to find interested buyers. Developers cut their losses and stop building new properties, as their old ones can’t even sell. Prices on newly built properties will lower dramatically as developers are faced with the decision to either sell for less or go into debt by not selling at all.
This is the magic point for buyers. As soon as those prices drop, they come back in full force! For a while, buyers will be able to snap up a bargain, but eventually, sellers will realise that the demand is returning and start to raise their prices. Activity will slowly return to the market as everyone wakes up from that nap they had before.
As the property cycle continues past the oversupply stage, prices will start creeping up. This period of time is often related to improved economic conditions and increased consumer confidence. The economy, the workforce, the consumers are all back on a roll. Before you know it, the market will have sailed through oversupply and the process will start all over again at undersupply!
Until next time,
* This article was first published on The Property Investor – http://www.tpimag.com/smart_money/timing-the-market-know-when-to-buy-sell/