Friday, 17 June 2011

The Matusik Snapshot the property clock


March 2011 No. 471
Property clock
In theory, at least, now appears to be a good time to buy.
We have featured the property clock in two previous Snapshots – in late 2003 and again in early 2006. At those times, like now, the residential market was in somewhat uncharted waters. The housing outlook was then, again like now, quite polarised.
Whilst a simple tool, the property clock is one of the more effective ways of clearly showing where things stand.














Chart 1 shows the traditional property clock, with 9 on the clock indicating the start of an upswing; 12 being the market peak; 3 the start of the downswing and 6 the market trough. Many of the residential markets across the country – as shown by the four clocks overleaf – are positioned between 2 and 7 on the clock. Far too many people wait to buy near the market peak rather than during a downswing or at the bottom of the market. When you move, either as a buyer or a seller, is second in importance only to location.
The positions on the property clock are determined by supply – either undersupply or oversupply. Everything else is either leading in to one of these market conditions or coming out of it. Let’s start with undersupply.
12 o’clock
An undersupplied market, where demand exceeds total supply. Rents and prices rise. The economy is strong, as is wage growth. It is a vendor’s market and the best time to sell.
3 o’clock
Asking prices become overwhelming and the market starts to lose confidence. An “evensupplied” market, where the number of properties for sale usually matches the number of buyers. Interest rates often rise and economic growth slows. Buyers wait for discounting to begin. A very cautious market.
6 o’clock
An oversupplied or buyer’s market. Harder economic times and usually at the tail end of high interest rates. Borrowers become frugal, some feeling that their income or even job is at risk. Residential property in general loses its shine. Ironically, it is often the best time to buy as many properties are undervalued at this time.
9 o’clock
In the lead up to 9 on the clock, stock is either withdrawn from sale or is sold, often at prices below replacement cost. The market supply tightens and buyers become more optimistic. Economic conditions improve, unemployment is low and wage growth high. Prices start to rise again, making new developments feasible once more. Spruikers return and property starts to become overvalued once more.
Residential markets also tend to fluctuate between undervaluation and overvaluation. What is “high” for a market (at 12 o’clock) and what is “low” (usually around 6 o’clock) is largely a matter of history. Property values usually increase over the long term. Over-valuated markets can be very seductive and hence why most buy too late, whilst the opposite sentiment holds true at the bottom of the cycle.
The Matusik Snapshot is opinion and not advice. Readers should seek their own professional advice on the subject being discussed.