When should you buy your investment property? So many “experts” are willing to tell you when you should buy. It’s essential to get advice from others though deciding the best time to buy is different for everyone. It depends on your personal circumstances, what is happening in the market, and your willingness to go and invest.
There are two apparent trends in the property market on reviewing the property values over the last 100 years.
- There is always a continuous cycle of boom, then bust, then returning to boom again. The length of the cycle is less predictable. The cycle has varied from a couple of years to over a decade.
- Residential properties are less likely to bust than commercial properties, as the government has a vested interest in keeping property prices from falling.
Property values go through these continual cycles due to a range of economic, political, environmental, global and cultural issues and changes, to name a few. The people respond to these issues in a particular way, consequently impacting the property market.
For most of us, a significant influencing factor in deciding when to property investing is interest rates, as it will determine the serviceability of the investment. Most Australians choose to have a variable rate mortgage. In countries like the United States, they are more likely to select fixed-rate loans. Although the fixed-rate mortgage is growing, we are more vulnerable to interest rate changes in Australia than in other countries.
People are more suspectable to be impacted by changes in the variable interest rates. Changes to the official rate determined by the RBA significantly impact Australian households more than other countries.
Currently, the RBA rates are at the lowest levels ever. These will not stay at this level forever. Many of us remember interest rates of 18%. There will be some significant fallout in the market when RBA cash rates increases increase from the record lows of 0.1%
Consumer confidence coupled with the affordability index has an enormous impact on whether people decide to make financial decisions such as purchasing a home. The consumer confidence figures are widely reported in the newspaper’s business section, along with the affordability index. The affordability index indicates how affordable homes are in each Australian city and town, considering income levels, interest rates, and mortgage repayments.
Unemployment rates play an essential role in the property market. The higher the rate, the less confidence. If the unemployment rate increases, people are often concerned about their job. This uncertainty makes people less likely to commit to a long term investment like a housing purchase. The national and state-wide unemployment figures are collected each month and reported widely in the press.
Another key factor which will help you determine if it is the right time to buy is the vacancy rate. Most real estate experts prefer an equilibrium vacancy rate of around 3% to 3.5%. Vacancy rates move either below or above this range, suggesting a short-term oversupply or shortage of properties. This instability in the vacancy rates can affect investor sentiment and prices in the short term. For example, if the vacancy rate moves to 5%, it might indicate a short-term decline or stagnation in prices.
Housing construction is the 3rd largest industry in Australia. 1 in 10 people is employed in this segment.
The nature of construction is that there are long lead times in starting and building. It is a juggernaut and takes years to change direction. A simple building application to build a property may take as long as two years.
Planning and building properties take years to change direction due to the large capital expenditure involved in the time taken to construct new properties. The construction industry is usually slow to react to major market changes as the costs of changing in many cases an intolerable solution.
As an example, if the housing industry is constructing, say, 45,000 homes per annum, it will take several years to either increase or reduce the number of dwellings regardless of the demand. This is because the industry sustains developers, builders and tradespeople. So, they will continue to produce homes at similar rates as they were previously following their current budget. It will only be after an extended period that some will leave the industry to go into state or another line of work. So, any shortfall between demand and supply of housing can cause market booms and bust
As you can see, so many factors need to be considered when purchasing a property. It will be different depending on where you are considering buying, along with your own personal circumstance. To invest, you should a strategic investment plan out it thoroughly to ensure you are not exposed and select the right strategy.
Whether you are a seasoned investor or not, it is always advisable to have a team around you to ensure you have all the right information and property investment advice.