Is it the time to get into property?

Is it the time to get into property?
Ed ChanMarch 24, 2014

Toby Johnstone wrote in the Sydney Morning Herald back in January 2014 that "investors' love affair with Sydney's property market could be over, with experts anticipating a slowdown in property speculation." 

"All the pointers are there showing that the Sydney investor market has overshot its fundamentals," the article quoted Andrew Wilson, the senior economist at Australian Property Monitors.

In the same piece, RP Data senior research analyst Cameron Kusher agreed, saying, "investors thinking of getting into the market had missed the boat. Whether you are chasing capital growth or rental return, neither look particularly strong at the moment certainly not as strong as 12 to 18 months ago. Given that, I do think that we will see a pullback in investor activity this year."

So what do you think? 

Recently I came across a graph (pictured below) that tracked both property growth over a long period of time but also identified yearly rates of change in property values. What's interesting about the graph below is that it shows where we are in the property cycle. 

 

Source: Jon Giaan

The blue line shows property values but the Orange line shows the actual change in property values year on year, and this is much more relevant in terms of determining when to get into the market and whether the market has run out of steam. 

You can see clearly that the market goes through many years with increasing annual growth rates and then reducing annual growth rates until finally several years of increasing negative annual growth rates before repeating itself. 

There are several more years of increasing yearly growth rates before the yearly growth rates start to taper off. 

The green line shows the current trend is upward in nature and, if history this will go on for a few years before the growth rate tapers off year on year until negative growth. 

You can see the positive yearly growth years are much more than the yearly negative growth years and that is why the blue line shows the property market trending upwards over the longer term. 

This also demonstrates that there are several more years of increasing yearly growth rates before the yearly growth rates start to taper off. 

In other words, if last year’s growth was 9.14%, and if the graph is right, we should get double digit growth rates this year and the next year an even higher rate. After that the yearly growth rates, whilst still positive, will be a lower rate year on year until it becomes negative. 

The reason for this is because of human nature. 

People are broken into four groups:

  1. Early adopters
  2. Middle adopters
  3. Late adopters 
  4. Never adopters 

The majority of people are middle to late adopters and they tend to create the momentum that is typical of property cycles. 

When the conditions first begin to change for property the early adopters get in first but the majority of people sit back waiting for more certainty and more people to invest. Hence the saying "the majority of people are like sheep".

In the meanwhile, if conditions change early adopters are also the first to get out (sometimes prematurely) but the middle adopters are still just getting in and this creates the momentum that shows up in the graphs as continuing forward momentum. 

This is than added to by the late adopters who are now just getting in, thus providing the "braking" effect to a plummeting of the annual growth rate. This gives the wave pattern we see in Orange

If you believe the historic property cycle will repeat itself, then this graph demonstrates that the momentum has started to build, the middle adopters are still getting in the market and we are not as yet at the top of the yearly growth rate cycle.

Whilst there are no guarantees, the graph seems to indicate we are still on the upward path and we have not yet started to experience reducing growth rates which would normally run for several more years before we experience negative yearly growth rates. 

Ed Chan

Ed Chan is a founding partner of Chan & Naylor accountants and a leading property tax specialist.

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