Lo­cal price moves hold key

Herald Sun - Property - - OPINION - RICHARD REED

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

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