If you're looking to get into property investment as a first-time home buyer, you'll eventually stumble across the phrases "timing the housing market" and "time in the housing market".
What exactly do two different sayings mean?
Put simply, "timing the housing market" refers to trying to predict when conditions will be right for buying or selling a property, while "time in the housing market" means holding onto a property for a longer period of time.
But which is the better investment strategy? Let's take a closer look.
Timing the housing market vs time in the housing market
As a property investor, navigating the real estate market can be confusing.
Should you time your purchase, or buy and hold it to invest for the long haul? Let's look at the benefits and downsides of each strategy.
Timing the housing market and the property cycle
When you try to time the housing market, this means buying and selling property based on fluctuations in prices according to economic indicators.
The idea behind this is that if you look back at the historical performance of our property market, you can see cyclical patterns. And when you apply those patterns to the present situation, it can give you an idea of what might be coming next to inform your investment moves.
The property market cycle
Generally, the property market cycle can be broken down into four distinct stages: recovery, expansion, hyper-supply, and recession.
During recovery, home prices start to rise from their lowest point as the market begins to regain momentum. Many consider this the prime time to buy property.
Expansion is usually still considered an ideal time for buyers as prices haven’t yet started to peak yet. During this time, there's likely to be low-interest rates as economic sentiment is positive. Real estate developers will be able to secure low-cost financing to start new projects and increase supply.
Hyper-supply is next, where a substantial increase in the number of properties on the market can lead to slower sales due to high supply and reduced demand. At this stage, investors will be hesitant to enter the market and those already in it will need to start preparing for the recession stage. Borrowers who do not have enough cash to weather the downturn may be forced to sell their property.
A recession brings a decrease in housing prices across all segments. This means buyers with liquidity could potentially get properties for much lower prices. However, buying real estate during this period can be risky as no one knows how long recessions will last.
What's wrong with trying to time the property market cycle?
In an ideal world, timing the property market cycle sounds simple. Just buy when property prices are at the bottom of the market and sell when the property value is at its peak.
But here's the issue:
Predicting when conditions will be right for buying or selling a property is difficult, if not impossible — even for property experts!
This type of strategy requires knowledge about the current context of the market and skilled decision-making.
Even if you have all of that, there are just too many variables at play — such as interest rates, unemployment levels, population growth, and so on.
Furthermore, Australia is composed of many states that all have their own market cycle that might be different from what's going on nationally.
For example, interest rate hikes from the Reserve Bank of Australia (RBA) were meant to help cool pandemic-driven property price surges (house values went up by almost 25% between March 2020 to February 2022). As expected, homeowners in Melbourne, Sydney, and Brisbane saw their property values take a hit in 2022. But places like Darwin and Perth have remained relatively unscathed because of factors like better affordability.
Let's say you do manage to correctly predict when prices are about to go up or down, there's no guarantee that you'll be able to act on that knowledge in time.
Worst of all, trying to time the market can put a lot of unnecessary stress on you and your family. What if you miss that chance to sell high or buy low?
Therefore, ask any property investment expert and they'll likely say that time in the housing market is a better strategy for your financial and mental health.
A better option: Time in the housing market
Time in the housing market means investing for the long haul.
This involves riding out the short-term ups and downs of the market (instead of constantly worrying about them) and holding onto your property for a longer period of time.
Here's why you can be confident that this is generally a better idea than timing the market.
Australia’s strong housing market fundamentals
Although past performance is not always an indicator of future performance, the Australian property market has been in a clear uptrend for the past 30 years where dwelling values have increased by 382%.
Even though there have been periods where prices have dipped (such as during the Global Financial Crisis), they have always rebounded and gone on to new highs.
This has been propelled by low housing supply and increasing demand in recent years which are likely to persist into the near future.
Low supply and increasing demand for Australian property
Overall construction activity has dropped by 2.4% in the June quarter of 2022 and is set to continue. This is fuelled by worker shortages, rising material costs, along with delays due to the COVID-19 pandemic. The lack of supply will help bolster property values.
International immigration and population growth will keep the demand for quality properties high. Ever since COVID-19 movement restrictions have eased, interest in Australia as a migration destination has resumed while the government is also opening up its shores to those with the right skills.
Albanese's Labor Government has already increased the number of available permanent migration visas in 2022-2023 to 195,000 from 160,000 places. This means there will be an extra 35,000 people looking for housing in the near future.
Our total population currently stands at 25 million in 2022 and is forecasted to reach 31 million by 2041.
Of course, population growth alone does not necessarily mean an automatic increase in home values. What really matters is that the balance between demand and supply doesn't tip towards an oversupply of homes.
Nevertheless, it's still a good sign in terms of dwelling value growth if population increases are expected in the decades to come.
In addition to housing supply and demand, Australia also has some other strong market fundamentals as outlined by InvestorKit's 2022 whitepaper. They looked at 25 key macro fundamentals and found that 17 of them were still considered in a "strong" or "very strong position". Here were some of the key takeaways:
- Low unemployment rates (3.5% as of June 2022).
- Growing household income (increased by 4% p.a. between 2016-2021). The minimum wage has also gone up by 5.2% from July 2022.
- Healthy economic growth (Commodity price index is up by 26.1% and there's been more than $272b has been poured into infrastructure development as of July 2022).
All of these factors point to continued strong price growth in Australia's major cities over the next few years even though we might see dips in the market.
Time in the property market and the power of compounding
Another benefit of buying and holding property for the long term is that you can reap the benefits of compounding.
Compounding is an incredibly powerful tool that can really help your finances grow. It doesn’t just apply strictly to stock market investments, but to real estate as well.
The simplest way to look at this is to consider how much money a home buyer could make if they made a long-term investment, even if this only resulted in a return of just 3% each year.
Over 20 years, that would mean the property had doubled in value.
Understanding time in the market and taking advantage of value-optimising strategies such as compounding can deliver extensive returns over the longer term.
What does this mean for investors?
While it's always tempting to try to 'time' the market by buying and selling at the right time, no one can accurately predict what will happen next.
Investing over the long term gives more surety of success as you're more likely to ride out any short-term disruptions and benefit from continual growth.
So if you're thinking of investing in Australian property, don't put off making a move because you think you need to time the market.
Act as soon as you can to start your time in the housing market.
Timing doesn't matter as much. Choosing a quality property does.
But remember, just because timing the market isn't the best strategy, don't be tempted to jump on the first opportunity that looks attractive.
Choosing a quality real estate investment is what matters a lot more than time.
Doing your homework can help you identify properties with the potential to provide higher cash flows and capital growth now and into the future.
Here are some quick tips on selecting the right property for your investment goals:
- Location is key! Scrutinise commute times, accessibility of amenities, town planning proposals, and its street appeal (the general attractiveness of the place and surrounding neighbourhood).
- Choose a property that's suited to the demographics of the neighbourhood. The needs of single professionals are different from young families. For example, you might prefer a house with a sizable living area and outside space if that suburb attracts young families. You also want to try and choose a property that would appeal to both renters and homebuyers in the long run.
- Do research on the returns for your property investment. If you don't plan to live in the home, having a good rental yield is important for cash flow. This will help you cover the monthly expenses associated with maintaining the property. Also, you'll also need to think about its potential for capital growth (how much its value will go up in the long term). This is related to its location, local demand, and factors discussed above. Lastly, consider if there is a potential for adding value through renovations which can help bump up your selling price.
- Analyse local supply and demand dynamics. Don't forget that different parts of Australia have different markets.
- Get advice from independent sources like market analysts or industry specialists who might have better knowledge of the area you're eying.
Investing in a high-quality property is more likely to bring you greater returns down the line compared to buying and selling low-quality real estate in the short term.
The lowdown on using time to hit your investment goals
Whether you're a first home buyer or a seasoned investor, timing the housing market is extremely difficult.
Instead of trying to predict the perfect time to buy your property, the better option is to hold on to your property for the long haul while riding out the ups and downs of the market.
Of course, there's no harm in doing some general research on the current market conditions. But focusing your efforts on looking for a quality property, and buying when you're ready will likely yield better results.
Australia also has a history of maintaining strong housing market fundamentals, which points to continued price growth in the years to come. And this works in favour of the "time in the market" strategy.
At OwnHome, we're also advocates for time in the market. So instead of waiting years to save up a 20% deposit, you can enter the property market a lot sooner.
Check out our calculator to discover your buying power.