When to buy property in a slowing real estate market
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When to buy property in a slowing real estate market

Property prices have fallen in many parts of Australia but have we hit the bottom of the cycle? And should you buy now?

By Kirsten Craze
Fri, Mar 10, 2023 8:30amGrey Clock 4 min

 Buy low, sell high. It’s the mantra for any asset transaction — and real estate is no different. Short of investing in a crystal ball, switched on buyers study market cycles to get the best impression of what the medium to long term holds.

Past behaviour of a suburb or property type is one of the best indicators of future behaviour at a micro level, but there are also a number of macro factors to be taken into account.

Watching the ticking property clock

Australian real estate travels through property cycles, which traditionally last between seven to 10 years. However, individual cities and towns (and then suburbs or property types within those locations) can run an independent race from the rest of the country.

National property valuation advisory firm Herron Todd White publishes a monthly ‘property clock’ which takes a regular snapshot of where house and unit markets are sitting within the cycle, indicating a market peak, a bottom, and the transitions in between.

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“The property clock is meant to be a kind of ready reckoner, so you can make a swift general comparison about what different markets are doing,” says Kevin Brogan, National Director, Group Risk and Compliance of Herron Todd White.

Although common sense might suggest it would be wise not to buy in areas sitting at the peak “12 o’clock” position, Brogan says it’s not always that simple.

“If somebody in Sydney is looking at a property in Adelaide, they might see it sitting in a peak position, but they’ll also look at the price point and think ‘Well, I don’t mind because Adelaide looks very affordable’. A local might feel differently.”

By the end of 2022, Sydney and Melbourne sat on the declining side of the “property clock” after reaching their peak positions in February 2022 and December 2021 respectively. Purchasers might be temped to take a “wait and see” approach, but there is no one-size-fits-all answer.

“You’ve had an interest rate environment putting pressure on buyers, but if there’s sustained demand in the market because of economic and population growth, that’s going to have a positive impact across different market segments,” Brogan says, adding that certain property types can also buck the cyclical trends.

“Vacant land and properties requiring refurbishment have struggled because of escalating building costs and concerns around the durations of projects.

“Conversely, renovated properties are selling quite well even in Sydney and Melbourne. So it’s very tempting to just look at a geographical market — and at a high level it’s quite useful to do that — but if you’re on the verge of making a decision, you need to look at the sub market too.”

Timing the market…

Waiting for the market to hit rock bottom might feel like the right buying strategy, however chief economist for Ray White Group, Nerida Conisbee, warns even schooled experts can often only pinpoint the trough in retrospect.

“Markets can move really quickly. At the start of the pandemic some economists were suggesting a 30 per cent decline, and then suddenly it turned around and we saw a 30 per cent increase,” she says.

Ray White chief economist Nerida Conisbee

From the first Reserve Bank official cash rate increase in April 2022, prices across many Australian markets started to decline after a short sharp boom, but just how long (and where) negative movement will be seen in 2023 depends on several factors.

“It’s been a slowdown that really had to happen because property was getting really too expensive,” Conisbee says. 

“But what we’re seeing is quite different changes to property values depending on where you are. 

“There’s such a diversion in geographic conditions, so much so that when people talk about a 20 percent price drop there’s absolutely no way that will happen across Australia. Even the market that’s most likely to see that drop would be Sydney because of the extraordinary gains, but it’s not going to be all of Sydney. Prices are certainly not going to drop to bargain levels.”

She added that since the recent price correction had been brought around almost solely by interest rates increases, once they stop the tables could turn.

“Once we start to see interest rates peak, potentially around March, that’s the point at which prices will start to stabilise,” she says. “And if you look at other factors that typically lead to price decline, we’re actually seeing the opposite. Population growth is starting to ramp up again and migration is back. 

“If you try and wait for the bottom, you could quickly find yourself in a dramatically different situation and you might discover you’ve missed the boat.”

…Or time in the market

It is a real estate cliche, but time in the market is often better than timing the market, says Brogan. 

“Although timing can be important in terms of the transaction to enter the market, you also have to consider how long you intend to hold the property for,” he says. “If you’re looking for a quick in and out, then timing is critical, but if you’re looking to hold for a period of time, it’s a different story.

“Everyone loves a bargain, everyone loves to tell their friends how well they’ve done in any transaction, particularly with property. 

“It’s only human nature to want to minimise your outlay, and that thinking won’t necessarily do you any harm. Unless, of course, analysis paralysis means you hold out or don’t act at all and you miss out altogether.”

Conisbee said the mistake many bargain-hunting buyers make in a declining real estate market is holding out too long only to jump in with everyone else.

“Of course it’s great to buy at the bottom of the market,” she says. “Ultimately though, if you’re holding on long term it doesn’t matter when you buy in a cycle. The best time to buy is when you find the right home in the right location at a price you can afford.”



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Stronger demand in some areas is pushing unit rents up faster than houses

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Renters are returning to the apartment market, leading to higher growth in weekly rents for units than houses over the past year, according to REA data. As workers return to their corporate offices, tenants are coming back to the inner city and choosing apartment living for its affordability.

This is a reversal of the pandemic trend which saw many renters leave their inner city units to rent affordable houses on the outskirts. Working from home meant they did not have to commute to the CBD, so they moved into large houses in outer areas where they could enjoy more space and privacy.

REA Group economic analyst Megan Lieu said the return to apartment living among tenants began in late 2021, when most lockdown restrictions were lifted, and accelerated in 2022 after Australia’s international border reopened.

Following the reopening of offices and in-person work, living within close proximity to CBDs has regained importance,” Ms Lieu said.Units not only tend to be located closer to public transport and in inner city areas, but are also cheaper to rent compared to houses in similar areas. For these reasons, it is unsurprising that units, particularly those in inner city areas, are growing in popularity among renters.

But the return to work in the CBD is not the only factor driving demand for apartment rentals. Rapidly rising weekly rents for all types of property, coupled with a cost-of-living crisis created by high inflation, has forced tenants to look for cheaper accommodation. This typically means compromising on space, with many families embracing apartment living again. At the same time, a huge wave of migration led by international students has turbocharged demand for unit rentals in inner city areas, in particular, because this is where many universities are located.

But it’s not simply a demand-side equation. Lockdowns put a pause on building activity, which reduced the supply of new rental homes to the market. People had to wait longer for their new houses to be built, which meant many of them were forced to remain in rental homes longer than expected. On top of that, a chronic shortage of social housing continued to push more people into the private rental market. After the world reopened, disrupted supply chains meant the cost of building increased, the supply of materials was strained, and a shortage of labour delayed projects.

All of this has driven up rents for all types of property, and the strength of demand has allowed landlords to raise rents more than usual to help them recover the increased costs of servicing their mortgages following 13 interest rate rises since May 2022. Many applicants for rentals are also offering more rent than advertised just to secure a home, which is pushing rental values even higher.

Tenants’ reversion to preferring apartments over houses is a nationwide trend that has led to stronger rental growth for units than houses, especially in the capital cities, says Ms Lieu. “Year-on-year, national weekly house rents have increased by 10.5 percent, an increase of $55 per week,” she said.However, unit rents have increased by 17 percent, which equates to an $80 weekly increase.

The variance is greatest in the capital cities where unit rents have risen twice as fast as house rents. Sydney is the most expensive city to rent in today, according to REA data. The house rent median is $720 per week, up 10.8 percent over the past year. The apartment rental median is $650 per week, up 18.2 percent. In Brisbane, the median house rent is $600 per week, up 9.1 percent over the past year, while the median rent for units is $535 per week, up 18.9 percent. In Melbourne, the median house rent is $540 per week, up 13.7 percent, while the apartment median is $500 per week, up 16.3 percent.

In regional markets, Queensland is the most expensive place to rent either a house or an apartment. The house median rent in regional Queensland is $600 per week, up 9.1 percent year-onyear, while the apartment median rent is $525, up 16.7 percent.

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