Why time in the market is more important than timing the market

When it comes to property investment, many buyers and investors become obsessed with the idea oftiming their property purchasewith the view that buying at the bottom of the market for the cheapest price is a formula for property success.

And considering the current property market conditions, this seems more prevalent than ever.

But, in my mind,timing the market is one of the biggest mistakesa property investor can make.

While it’s tempting to try to time the market to maximize your profits, this strategy is often a poor choice for property investors.

Instead, focusing on “time in the market” is a much more effective approach

And here’s why.

Everything works in cycles

Australia has eight states and territories and the property markets in each location have their owncycle, and then there are cycles within those cycles.

They all also vary in length and are affected by a myriad of social and economic factors and then, at times, the government lengthens or shortens the cycle by changing economic policies or interest rates.

The issue is that no one really knows, not even the experts, how long each cycle will last because it depends on a huge number of variables including economic conditions as well as human behaviour – and we all know how hard that is to predict.

CoreLogic’s datais a clear reminder of the cyclical nature of housing markets and how despite all the challenges thrown at them, our property markets are resilient.

Let’s look back even further…what happened over the last 40 years.

Independent financial commentatorStuart WemyssofProsolution Private Clientshas charted ABS statistics going back over 40 years.

The Melbourne housing market experienced an average compounding property price growth of 8.2%
The Sydney housing market experienced an average compounding property price growth of 7.9%
The Brisbane housing market experienced an average compounding property price growth of 7.6%

In other words well located properties in our 3 big capital cities have more than doubled in value every 10 years

And while this long term growth is impressive, as I said, it’s important to remember that each state has its own property cycle with years of minimal or no growth followed by periods of strong growth.

What property investors need to do instead

Instead of timing the market, sophisticated property investors understand that they need to focus their efforts on buying aninvestment-gradeproperty, in anA-gradelocation at the time which suits them.

The important part of that statement is that they always buy “investment grade” properties in good locations because these are the type of properties which will outperform in the long run.

Smart investors don’t wait around for the lowest prices or for a downturn, they buy when they have their finance ready.

It can be tempting, especially in a downturn like we’re currently experiencing, to hang on and wait for prices to lower further with the idea that you’ll get more ‘bang for your buck’.

But the reality is, that investment-grade properties in good locations are more stable than in other markets and the point of the cycle is less important if you’re committed to holding the property long-term.

This means that it doesn’t really matter when you enter the market if the value ofyour property will double in value over a 10 year period as it has over the last 40 years.

What’s important is that you hold the property for long enough to seecompound growth.

This strategy would also help you to ride out any temporary market fluctuations.

That way, when it comes time to sell down some of your assets when you reach retirement, or whenever is the right time for you, you will have created wealth from your portfolio’s compounding equity over the decades.

The risk is that by waiting for the ‘perfect time’, property investors risk missing out on timeinthe market which translates into money earned, or they could even miss out on investment grade opportunities altogether.

What about rising interest rates – should I wait?

Now I know some investors are concerned that rising interest rates means it costs more to hold a property with a mortgage, and there will be less people who can afford to buy a house, more properties will end up on the market as “stretched” investors and home owners try to sell up, and that higher rates could therefore cause house prices to fall for an extended period.

So in their mind it makes sense to try and time the market.

While rising interest rates may cause some potential real estate investors to hesitate, waiting to buy an investment property can actually be detrimental in the long run.

What about the current market downturn?

You’ve probably also read those forecasts – you know…that property values will fall 10 to 15%.

In fact…Property Prices Will Fall 30%was a recent headline in the Australian Financial Review by a respected columnist, and here he was not talking about a specific segment of the market, but about“the Australian property market”.

Fact is…. a fall of this magnitude has never happened before.

Not during the recession of the 1990s, not during the global financial crisis and not during the period of a credit squeeze in 2017-18.

The worst slump in the overall Australian property market was after the credit squeeze on 2016-17 and when there were concerns around proposed changes to negative gearing before the 2019 election.

And at that time the peak to trough drop between December 2017 and June 2019 was 9.9%

So let’s look at some of the prevailing influences on the housing markets.

NEGATIVE INFLUENCES ON OUR PROPERTY MARKETS

Sure our housing markets are facing some headwinds, including:

Consumer confidence has taken a significant hit and that’s affecting our housing markets with buyers being more cautious and many taking a wait-and-see approach, while sellers’ confidence is more fragile.
Fear of rising inflationand cost of living pressures is sidelining many buyers
Rising interest rates are reducingborrowing capacity
Uncertaintyabout our economic future with all the talk of a recession overseas, ongoing geopolitical problems, the share market falling is dampening buyer and seller confidence
Affordability issues will constrain many buyers: The impetus of low-interest rates allowing borrowers to pay more has worked its way through the system.
Now, with property values being 20- 30% higher than at the beginning of this cycle – and at a time when wages growth has been moderate at best and minimal in real terms for most Australians – this means that the average home buyer won’t have more money in their pocket to pay more for their home.
The pent-up demand is waning: While many buyers delayed their home-buying plans over the last few years because of Covid, a significant volume already made their move. There are only so many buyers and sellers out there, so we can expect there will be fewer looking to buy in 2022.
FOMO (Fear of Missing Out) has disappeared: Buyers are being more cautious and taking their time to make decisions. This is in stark contrast to last year when many took shortcuts to enter the market.

On the other hand, there are some…

STRONG FUNDAMENTALS UNDERPINNING OUR HOUSING MARKETS

These include:

There is ashortage of good propertiesfor sale and virtually no properties to rent
International immigrationis picking up and this will increase the demand for housing.
There islittle new constructionin the pipeline – we’re just not building enough dwellings andincreasing construction costsat a time of a shortage of labour means the end value of new projects will need to be up to 20% higher to make projects financially viable for developers.
Oureconomy is still growingstrongly and is very resilient
Unemploymentis at historically low levels meaning anyone who wants a job can get a job (so they’ll be able to pay the mortgage repayments.)
Wagesare starting to grow
Household balance sheets are strong– we have a ‘natural buffer’ with $250- $260 billion in aggregate savings nationally,much of it in offset accounts.
Many borrowers are ahead in their mortgage payments– Matt Comyn, chief executive of Commonwealth Bank recently said that three-quarters of their loans are approximately two years ahead on repayments.
We have astrong banking systemthat has been strict in its lending criteria, meaning there are very few non-performing loans.
There are stillGovernment incentivesto encourage first-home buyers into the market.

The last few years have shown us how hard it is to forecast property trends… but there are some lessons we can learn from the past…

There is currently a window of opportunity.

Taking away consumer sentiment, Australia’s housing and economic fundamentals are very sound.

Households are cashed up, equity growth has been phenomenal for most homeowners and property investors , the job market is strong and Australia’s mortgage delinquencies are very low.

What this means is that the current poor consumer sentiment when most other economic fundamentals are strong is a bit like a cloud covering the sun.

Spring will follow Winter, and Summer will follow Spring – this too shall pass by and the long term upward trend of the value of well located properties will continue.

So my recommendation is that if you’re in a financially sound position, you should not try and time the market, but rather buy while others are sitting on the sidelines

If you think about it…

There is less competition at present.
You have more time to conduct your research and due diligence.
It’s a buyer’s market so you’ll have the upper hand in negotiations.

But don’t look for a bargain – A grade homes and investment grade properties are in short supply and still selling for reasonably good prices.

These high-quality properties tend to hold their value far better than B and C grade properties located in inferior positions and inferior suburbs.

And remember, there are multiple property markets around Australia, and at the moment while many markets are experiencing falling prices, some are still growing, while others are poised for growth over the next year.

While, to some degree,timing the market is important,it is definitely not the key to investment success.

There’s a saying in property circles that goes:

“When was the best time to buy property? 20 years ago!
When is the second-best time – today!”

In other words, you buy when you can afford to and when you are ready to.

By Michael Yardney
Originally published by Property Update

Why time in the market is more important than timing the market - The Property Market (2024)