Local price moves hold key
THERE used to be a popular drawing of an elderly bearded man accompanied by the wording “this is the man who waited for real estate prices to come down”.
The purpose was to suggest property values never fall, but is this actually true? The short answer is “it depends”.
For example, at the moment the Sydney residential market is experiencing a massive increase in house prices and practically everyone agrees this can’t go on forever. But will prices fall?
The talk will often refer to a “correction” in the marketplace, or possibly a “boom-bust” scenario.
Either way, real estate markets are a factor of supply and demand considerations. Undersupply leads to a “boom” and oversupply leads to a “bust”.
As land is of limited supply, there is an argument that a good location will always be in demand. There is evidence that cycles exist in most real estate markets, however they are poorly understood in housing markets by many people.
Understanding the supply and demand dynamics is the starting point, however a lot of emphasis is placed on the larger cycle in the overall housing market, as well as the current mortgage lending rate.
At the same time each suburb also has its own cycle which both buyers and sellers should be familiar with. Some suburbs are on the way up and others are on the way down, or at least levelling out.
Prudent buyers should seek to buy at the bottom of the suburb cycle and sellers should aim to sell at the top.
This is easier said than done, however it is not that difficult to work out the status of a particular suburb with reference to its own cycle.
Local knowledge is essential, along with a good understanding of the market dynamics. As there is little research in this area, it is largely up to individuals to conduct their own research.
For example, when bidding at an auction an informed buyer will know exactly how much the property is worth and the maximum they should pay.
There are different factors which contribute to individual suburban cycles. These include the geographical size of a suburb, its proximity to the city centre and the local shopping centre, distance to public transport and roads, the type of housing, the characteristics of current residents, availability of the real estate for sale in other suburbs and perceptions of the suburb.
Tracking the historical median sale trends in a suburb, in comparison to the broader housing market in the town or city, will also give an insight.
Most suburbs are in a state of constant transition.
Many older residents can easily recall when their now expensive suburbs were unpopular and in low demand.
In many cases, over time new households moving in caused the suburbs to undergo gentrification.
This remains one of the largest upward drivers in property cycles, so looking for a house in a suburb that will be the next in high demand is an excellent starting place.
Every suburb is in its own cycle but only careful research will determine if a suburb is on the way up soon.
Understanding the supply and demand fundamentals is standard economic theory which affects all of us in daily life. But understanding oversupply and undersupply in the property market is the challenge for everyone to pick the correct timing in the cycle.
Richard Reed is a professor of property and real estate at Deakin University