Maybe you have existing property investments and years of experience or maybe you are just starting out. Either way, you need to develop a way to monitor the market factors that could affect the growth or decline of property values.
And not only do you need to monitor them, you need to be able to understand what these factors could mean and then act accordingly. That could mean acquiring more property, selling some, refinancing loans, increasing or decreasing the rent on your properties.
You see property is much less about what has happened than what will happen. When you buy a property you may have done so based on past performance, but what you will own is what will happen with growth and income in the future.
Therefore to be a better investor, you should be constantly monitoring these eight factors as a minimum to get the most from your investment portfolio.
1. INTEREST RATES
Australia is currently enjoying its cheapest ever interest rates. Record low interest rates has meant property buyers have been borrowing more for less monthly payments – this certainly has been a factor in the prices rises in some cities in recent years. Though interesting to note, low rates by themselves don’t mean prices will rise – take Perth & Darwin as examples of markets that have fallen during this time of low rates.
You can be certain that at some point, rates will again begin the upward cycle, and though I can’t see any reason this could happen soon, it will, sure as night follows day. And when it does, the unwary might be caught out with loans they can’t afford. This could begin a rush for the exits as people try to sell these homes, likely in to a market now flooded by owners with the same challenge.
If rates begin a move up, you could lock in a fixed rate or perhaps sell if you need to do so – but don’t wait too long to make that decision.
We have had a relatively low rate of unemployment due to 25 consecutive years of positive economic growth. If people are confident they have a stable job, they are more likely to be out there spending up and pushing up prices.
If the economy slows, the job market deteriorates, unemployment rises, incomes become uncertain, confidence falls and property prices suffer as people try to sell.
3. AUCTION CLEARANCE RATES
Some pundits view auction clearance rates as a barometer of a property market health.
It’s an indicator on the balance between buyers and sellers, which is the fundamental supply and demand foundation of all property markets.
The higher the clearance rate, the healthier the market as it indicates there are plenty of buyers competing for stock on the market.
In Sydney & Melbourne auction clearance rates are still hovering between 70-80%, which is a relatively high number and a strong sign for those markets right now. If those rates go higher, look for higher prices and if they drop away, demand is dropping and unless stock levels fall too, prices will settle and perhaps drop away.
4. VACANCY RATES
This is simply a calculation of the number of rental properties available for rent versus the number of rental properties that are occupied. If there are five empty properties in a portfolio of 100, then the vacancy rate for that portfolio is 5%.
Generally speaking a 3% rate is accepted as a normal balance of demand and supply between landlords & tenants. To put that in real terms, the average property at 3% vacancy would be empty for 11 days of each year, which is about the time it would take to vacate the old tenants and move in the new.
Vacancy rates above 3% could mean there aren’t enough tenants so investors will either have to slash their rents to attract tenants or sell the property. Lower vacancy rates could mean an opportunity for higher rental returns and leading to that higher property values.
5. RENTAL YIELDS
In property cycles, capital values begin to move up first, prior to a rental increase. For example you may have paid $400,000 for a property that rants at $300 per week, which would be a gross yield of (300 x 52)/400,000 = 3.9%. If the prices moved up to $450,000, without an immediate move up in the rent your yield would fall – (300×52)/450,000 = 3.4%.
You may have noticed that yields are falling in the markets where price growth is strongest. This can presage a slowing in growth rates while investors wait for rental returns to catch up, which they do as people can no longer afford to buy and must rent – which starts another cycle.
6. new home CONSTRUCTION
In most Australian states the number of homes & apartments under construction are at historically high numbers. The key is to understand whether or not these homes have been sold to buyers who can complete, or if they have been built on spec to sell in to an open market, where the developers may or may not find willing buyers.
Currently speaking most of these projects are pre-sold, therefore you may think that there is little risk of oversupply. However there may be an element of buyers who when time comes to settle who may not be able to complete. Depending on how many this could present over-supply challenges.
There is a school of thought that Australia needs around 200,000 new homes every year on average to accommodate population growth, both natural and overseas immigration. If you see extended periods where the number is higher than this it may constitute oversupply and values could fall. If we aren’t building enough homes, as many commentators believe, then prices should remain firm.
7. SALES VOLUMES
You should be constantly monitoring the markets you are interest in to see how many properties are selling each month, versus long term averages. As volumes drop away, there is less interest from buyers and prices can flatten or fall. If sales volumes are increasing and are above long term averages, then that level of activity could lead to price increases. Most state Real Estate Institutes websites can provide this type of information.
8. PROPERTY ON MARKET
This indicator is very much allied to sales volume. Rising numbers of stock on market, higher than long term average, can demonstrate that property is not selling. With much more choice, buyers can pick and choose and not be as hasty with their offers – prices can move sideways or down in this circumstance. And the reverse is true, I am always wanting to know where the level of stock is falling, because this means more competition among buyers and inevitable price increases.
Being aware and up to date on what is happening in these segments can seriously affect your wealth.
What will you do to set up a system to monitor these important market factors?