"Residential property in Australia has a long and successful history of investment performance over time and is one of the lowest risk forms of growth investment available, consistently out-performing and demonstrating less volatility than other forms of investment".
One of the reasons for this high level of security is that residential property is the only market in which we can invest, which is not dominated by investors driven by profit motive. This limits the impact of market psychology on values whereby a large number of people can act in unison to drive a market rapidly higher or lower creating the volatility that we see in the share market and other places from time to time. For over 30 years I have been challenging audiences of investors, financial advisors and other experts to name another one. No one has so far.
In that respect residential property is unique. That's not to say it always goes up in value. It doesn't. Or that it never falls in value. It can - and does. But one of the outstanding features of residential investment is capital growth, or increasing property value over time. It is this factor that allows us to use residential property as a medium to progressively grow our net worth through prudent and strategic investment.
The residential market, like most things, is cyclical and the forces of supply and demand are, and always will be, the engine that drives residential prices.
In general terms if demand exceeds supply, prices will rise. If supply exceeds demand, prices will fall, or remain the same. If demand equals supply, nothing much will change. But in property terms, what is supply and demand?
Let's break it down into their components. By doing this, we can identify the likely direction of price movements at any point in time. This was the basis of a market model which we developed over many years to assist us to predict market movements. It became an indispensable tool for making investment decisions.
Supply of property in a residential market means the total stock of dwellings which exist in that market, not to be confused with the volume of property on the market for sale. A common mistake. Forecasting changes to the number of dwellings is the important point. This involves quantifying the likely rate of completion of new dwellings, the number of demolitions of existing dwellings, allowing for second or holiday homes which are not primary residences and for any rental vacancy factor.
Demand in a property market relates to the number of households that require a roof over their heads, and how that may change over time. Sounds simple, but in fact, is quite complex and strangely fascinating.
Consider these points, all of which contribute to that demand in a specific market. The current number of households, the shrinking size of those households, the explosion of single person households due to people living longer, high divorce rates, the immigration cycle, interstate migration patterns, children living with parents longer than in the past, marrying later, having children later, the birth rate, changes in employment locations and the effect of the information revolution.
All these come together to tell us the rate of new household formation for a given area, and therefore the number of dwellings that are required to house that population. It brings a high degree of predictability into the equation.
It does not logically follow that a population surge from any source will necessarily lead to growth or boom times. It is the overall equation of supply and demand which determines the final result.
All the factors which make-up supply and demand can be estimated, quantified, calculated, predicted, extrapolated, massaged and brought together to create an informative picture which indicates the likely oversupply or deficiency of housing stock in the market.
Where an underlying under-supply is indicated, "all things being equal", the natural conclusion can only be that given reasonable economic conditions, the growth engine is fuelled up and prices will rise. Equally, if the market is oversupplied, even in strong economic conditions, the tank is empty and growth other than perhaps keeping up with inflation will not happen.
It's not a good idea to wait until an upturn is well under way before starting or adding to your property investment portfolio. That's a good way to get your fingers burned. It is demonstrably better to buy too soon rather than too late.
There is a school of thought which says that time in the market is far more important than timing the market. While there is no question that taking a long term approach makes sense, timing your point of entry into the market does matter. You do not want to be one of the many investors that buy at the top of the cycle. They are the people who decide a couple of years later that property investment is not for them and compound their error by not only buying at the wrong time but also going on to sell at the wrong time. A double whammy.
The Property Clock