WHEN THE MARKET PEAKS, HOW DO YOU KNOW WHEN TO SELL AND GET OUT?
Property investment requires a unique blend of strategic thought, bravery, patience and nerves of steel. Property market cycles can take 10 years to turn back in your favour, sometimes longer and there are so many variables involved it can challenge even the best of us. Close study can provide some insight into how things may go, but the reality is that it’s a dynamic beast, sensitive to a range of variables, none of which are directly within your control. So, when the market turns against you, how do you know what your next move is and when to make it?
Australian property investors are lucky in most respects – we have a relatively stable market and strategic choices can reap great rewards for those who play the long game. Buyers are largely sentimental and the psychology of the market is also an important consideration. Buyer activity tends to follow a herd mentality, with most people wanting in as the expansion phase commences, rather than waiting for the correction or the contraction to happen. Many property owners will sell during buyer demand, even though the best sales results may still be ahead of them. Conversely, increased competition amongst buyers fuels purchases in less than ideal conditions too – the thrill of the chase if you like. Buyers will engage, buying into something that may not be the right purchase for them, simply from fear of missing out. Understanding the cycles of the property market means you can know when it’s a good time to buy property. A savvy investor will buy in low to nab a bargain and sell at the market’s peak to turn a profit, rather than following the herd that just tracks whether it’s generically a ‘buyer’s market’ or ‘seller’s market’.
Being intuitive about the cycles comes from knowing the fundamentals of how they work – then you can be clear on what stage of the cycle the market is in. Timing is everything, but generally, the market goes through four phases - expansion, correction, contraction and then a period of restarting; establishing a normal pattern once again before the cycle repeats itself. Basically, the cycle follows a pattern of reaching its peak (expansion), stabilising and hitting a mid-range – prices hover below the peak but above the previous lower market rates (correction), a further drop to below the previous low point in the market (contraction) and then an increase to above the lower price points, but still below the highest point in the expansion phase.
This is of course a very analytical approach and each cycle is different. The time period a cycle lasts for varies and is entirely dependent on a range of variables. Interest rates, global economic factors, local and global events such as natural disasters or terrorism, tax incentives, foreign investments and more, are all factors that can push things in one direction or another. Also, each Australian state and territory goes through its own individual property cycles too – so keeping abreast of national as well as local trends may benefit you. Selling high in one state can give you great capital to buy low in another one for example, as individual markets adjust. Keeping updated about issues that affect the markets, as well as watching the markets themselves, will put you in good stead to be responsive if and when the opportunity or need arises. Keeping your emotions in check is the number one priority, whatever cycle the market is in. Selling in a panic as the market falls is a rookie mistake, as is buying too late because you got caught up in the hype of a hot market.
Part of your decision to sell will be informed by your long-term investment strategy, however plans change and if the market presents you with an opportunity, don’t hesitate to shift your focus if the opportunity is right. That bargain you picked up 7 years ago may well net you a tidy profit in 20 years’ time, but if there are signs of a peak now in the market, why wait? Growing media interest, consistent growth over a considerable period of time and property and economic reports reinforcing the positives of the situation are all signs that point you to a market at, or nearing its peak. The most important thing you can do is educate yourself to recognise how the market can serve you best and make your decisions accordingly.