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Let's talk "Time"-

Property Cycles at the street level in Perth and the crystal ball;

Some of us will recall a time in Perth, not that long ago, when there were buyers queued up in front of land sales offices, many worried and stressed with the thoughts of missing out on a ‘block of land’. Reality of the day was that many actually “camped out”, in order to have first pick at securing their dream block of land!

That was also a time when frenzied property buying activity saw properties snapped up within a day or two of listing and I’m not talking about a few properties around town either.

An interesting statistic to recall is that between 2000-01 and 2005-06 established home prices increased by a whopping 111.8% (or an average of 16.2% per year)*source – Valuer Generals Office WA

An industry analyst at the time, with bold forecasts on the strength of the resource rich mining state (WA) economy continuing to grow, outlined that Perth would soon surpass Sydney with the title of having the most expensive median house price in the country (Perth’s median house price had moved up to within 5.5% short of Sydney’s median house price at the time).

This was a very different time. Many have called it a “once in a generation boom” in reference to the mining boom that came to Western Australia and the profound impact it had on the local economy. The property industry was at the time, caught up in absolute hysteria.

We move on, forward around 10 years and don’t we have a very different property market in Perth. The time taken to sell a property is now around 71 days (measured as Average selling days – REIWAOct17). We don’t have the same hype, interest, nor in fact do we have a mining boom, either! 

In fact, reports have been flooding in from Economics and Property research houses, revealing how Perth may be in for a rude shock as the oversupply of houses and apartments is set to worsen into 2018 (ABC News aug17). Headlines and market commentary on the state of affairs of the Perth property market have been banging the same drum for a little while now, the noise similar to that of a CoreLogic (may17) article, revealing that Perth house prices have only increased on average by 2.3% in the past 10 years, .

So what is the ‘Property Clock’?

Put simply, the property clock is a method we might use to try and make sense of the ups and downs, the good times and the bad, in the ever changing property market. 

The Property clock can also be seen as akin to a thermometer, in that it reveals the temperature (position) of the property market at a particular point in time. Markets are continually changing (aka the detail noted above 2007 – 2017), and the property clock can be used as a way to “read” the current state of play, like taking the temperature of a “HOT” market ie 12 o’clock (such as we had in Perth around 2006 – 2007) through to a “Cold” market ie 6 o’clock (like many would say we have right now in Perth in 2017).

Of course there is much change that occurs in the market between 12 o’clock high and 6 o’clock low. Some would say the Perth property market in November 2017 is at 4 o’clock? What does this all mean? There have been a few different models of the property clock developed over the years to help explain the changing nature of property markets. One of the easiest ways, I feel, to help explain the different times on the property clock is in the diagram below:

property-clock-image

We can see that this diagram shows the characteristics of the different stages of the property market at different times on the clock. There have been many technical papers written, detailing the economic theory behind each stage of the market. Like carrying out a “napkin valuation”, I have a quick way of looking at the behaviour of the property market at different times on the clock.

Let’s start by having a look at the time – 12 o’clock high to 3 o’clock.

Property Clock 12.00 - 3.00

property-clock-image-slowdown21a

This is the time where, having reached the peak of the property cycle, this stage (Slowdown) commences with fewer buyers turning up for home opens and/or bidding for property. This happens for a number of reasons but is usually due to buyer’s affordability having reached its peak. Buyers become more price sensitive, and question the “value” in the deal. Demand starts to wane. Media headlines pick up on the change in buyer enthusiasm, which is reported in many ways (ie/ auction clearance rates, home open traffic, etc).

First home buyers, who at 11 o’clock, had all the confidence in the world to buy their first home, have put the brakes on and now adopt a wait and see approach.

Property Clock 3.01 - 6.00

property-clock-image-slump-oversupply1a

This stage of the cycle (Slump) is typically characterised by the lack of demand for property which shows up through the longer time taken to sell property. With less demand for property, sellers have to readjust their expectations to match the market which can sometimes result in an ugly affair on pricing!

The market is also filled with property owners who feel the pain of being “burnt” from having bought at the peak of the last cycle. These 12’oclock buyers are often struggling to make the debt repayments without it affecting their everyday lives and so having had enough of servicing their loans, and often combined with no prospect of capital growth upside, decide to sell up!

First home buyers, servicing debt repayments, some where the value of their property has fallen into negative equity space, struggle to try and make ends meet and so decide to cut their losses and sell up!

Bottom line is that there is typically a huge increase to the supply of properties available for sale. We often hear the “R” word being used at this stage in the property cycle as little investment occurs in the property market, unemployment takes its toll and there’s no enthusiasm in buying an investment property.

But wait! With a sniff of a good deal, you’ll find there’s almost always a prospective buyer whose valuation shows “upside” as the new discounted property pricing represents value buying to them – even doing deals at below replacement cost.

Property Clock 6.01 - 9.00

Green Shoots!! The term often used in times of economic recovery, following a slump. To a seasoned investor, “6.30” is the term, used in reference to the clock, as the optimum time to be buying as it’s all upside from here on. The talk on the town is that someone knows someone who got the “best deal” on a property, EVER!!

property-clock-image-absorbtion

Sellers, in anticipation that the market is picking up, take their property off the market and adopt a wait and see approach or if they have to sell, stop discounting. With increasing demand, a fight to win the next “best deal” occurs and as a consequence, prices rise. The temperature’s rising!

Property Clock 9.01 - 12.00

property-clock-image-High-demand-(2)1a

This is the stage in the property cycle when everyone’s picking a “winner”. With a huge number of Buyers chasing fewer and fewer properties for sale (as they get snapped up super-fast) the supply constraint puts upward pressure on prices which translates into BOOM times! With such high demand for property, new development occurs and the whole property market is abuzz in the good times. Landowner’s feel positive as they see property values around them increase, which in turn gives them the confidence to spend more readily on improvements, new buildings, etc. Many even decide to revisit their valuation and do interesting things with the increased equity in their home. 

But wait!! As prices have gone into the stratosphere, affordability becomes an issue while other’s start to rethink that “great deal”. They’re not so sure there’s any value left.

You guessed it! We’re moving along the clock towards 1 o’clock. And so the cycle turns around again!

lady-watch-property-clock

What does this all mean?

For many of us, we’re choosing a suburb to live in, where we want to raise a family, were we’re close to the amenity we love and cherish that the area provides. You’ve found your place!! These are but a few of the “Other” considerations in our consumer property buying decision process.

Don’t get worked up about the “Headline numbers”, media outlets need to sell stories, first and foremost. Property is a series of submarkets that can be drilled down further again into submarkets of submarkets. What’s recently been happening in the Sydney and Melbourne property markets are in direct contrast to the interesting state of affairs in the Perth property market. What’s happening in the Perth inner city residential property market is different to what’s happening in the outer fringe residential property market of Perth.

Many external factors also impact on a sub-markets localised appeal. New infrastructure projects such as new road / rail projects, shopping centre expansions, new buildings etc, can also add weight to the prospective desirability of an area. For others it could be the noted gentrification of a suburb or a planning change or an urban regeneration underway that adds to the appeal / desirability to want to live +/or invest in that area.

The property market has so many moving parts that it would be remiss to get worked up by the headlines. With so much “EMOTION” behind much of the real estate consumer’s buying decision, the “clock” can’t always show the true state of affairs of “The-Market”.

For many, they’re just not worried about the time!

*Choose your Property Agent wisely! An agent who understands the property clock and employs the right strategies based on the current time / what’s happening in the local market.

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