Wouldn’t it be nice to perfectly time the property market?
Is now a good time to invest in real estate?
Keep reading, I will help you find your answer.
This takes balls. Because if sh*t hits the fan you could lose a lot of money. And the fan can be hit with all varieties of sh*t – from all different angles.
The following types of sh*ts could be incurred:
- “Sh*t, I lost my job and can’t make loan repayments”
- “Sh*t, I can’t find a tenant and can’t afford the rates this quarter”
- “Sh*t, we bought at the peak of the market and now prices are falling faster than gravity”
- “Sh*t, the tenants are always wanting us to fix things – we’re losing money on this investment”
I could keep going, but I’m going to stop talking sh*t for a moment, because if things go okay, there is potential to make a tidy little profit, get some passive income or, at the very least, acquire some investment experience.
So, let’s get back to your original question.
Is Now A Good Time To Buy Property?
The best time to buy property is only one thing you need to consider. Why? Well, while timing is very important, so is price. You could overpay for a house even though it’s the right time to buy a house and end up losing money, or you could get a great deal on a house when the house price forecast is not too favourable and still make money.
Therefore, your entry and exit price is just as important as whether now is a good time to buy a house… or unit… or factory,.. or whatever you’re looking to buy.
Now, every man and his dog is out there giving their house price predictions. Some will be right and some will be waaaay off.
So, with all the noise around, who should you listen to?
Well… me…. of course!
Nah, just kidding. I don’t know sh*t about forecasting property prices.
BUT, I do have something that I have found useful over the years to give me an indication of what is happening in the economy and how that may help determine if now is the right time to buy a house, or even if this is a good time to sell a house.
I present to you…. The Investment Clock
Okay, so there are a few different variations of the investment clock, but I like this one (it’s one of the simpler versions). The investment clock can be used as a rough guide to help you determine the best time to buy a house and if it’s wise to buy a house now.
First, let’s quickly interpret the Investment Clock, above.
If we begin at 12 o’clock we can see that this is the top of the boom – something is about to give. Property prices and share prices have been going up and up and up and up – the path to this point (i.e. 9 o’clock to 12 o’clock) generally occurs in lower interest rate environments and when banks are lending freely (i.e. less restrictive on who can borrow and how much).
The next thing that begins to happen is that interest rates start to rise – this is the first sign that the wheels are in motion for a decline in share prices and, eventually, property prices.
After the slow down, we enter a recession. The banks and lenders become tighter and more restrictive on who they will lend money to and how much, which inevitably results in falling real estate values.
Well, quite simply, if fewer people can borrow less money, then there are fewer people able to buy property. There will be fewer people at open homes and nowhere near as many at auctions.
This is the depth of the recession.
Now, this doesn’t necessarily mean that we are in a recession in the dramatic economic sense of the word that gets flung around on newspaper headlines, but it does mean that the economy is receding from its highs.
So, what follows?
Well, interest rates begin to fall again. This is one of the Reserve Bank of Australia’s (RBA) biggest levers in ensuring a stable economy – I will do a blog post on why the RBA changes interest rates at a later date.
By lowering interest rates, the RBA is attempting to stimulate the economy.
(Notice how the only time the word ‘economy’ sounds sexy is when the word ‘stimulate’ is used in the same sentence?)
They are essentially saying, “It is cheaper to borrow money now”, “Go and borrow money”, “Use that money to buy property for people to rent so you earn money and pay tax”, “Use it to buy a factory for businesses to work from so you and the business can earn money and pay tax”, “Use it to buy shares, so that the companies will have more money for innovation and to eventually employ more people who will pay tax”, “Borrow money for your own business so you can expand and grow (and ultimately pay more taxes) – then, as you grow, borrow more so you can hire staff so they can earn (and ultimately pay more taxes)”
These are the messages being sent to society when interest rates begin to fall.
So, what happens then?
Share prices begin to rise, the demand for commodities begin to rise, money becomes much easier to obtain and, finally,more people have more money, so there are more people at open homes and auctions, which means there is more demand for each property and, consequently, real estate values begin to increase.
Then, the cycle begins again.
However, there is one very important rule to remember: While the economy will generally follow the clockwise direction of the Investment Clock, the months or years between each “o’clock” will differ on each cycle.
For example, the time between 1 o’clock and 2 o’clock could be, say 12 months this time, but next cycle in, say, 8 years’ time, might take 3 years between interest rates rising and share prices falling.
The same goes for the bottom of the clock. Lending might become tighter, but it could take years and years for real estate values to fall.
That’s why this Investment Clock should only be used as a rough guide as to where our economy is at any given time.
Then, when you’re ready to buy a home, or investment property, or even shares, you can look at the clock, decide on what time you think it is, and determine whether or not now is a wise time to invest in real estate.
So, When Is The Right Time To Buy A House?
Only you will know when is the right time to buy a house.
As a rule of thumb, it is usually best to have at least a 20% deposit for a home to avoid paying lenders mortgage insurance. Lenders mortgage insurance is a premium you pay as part of your home loan or investment loan to protect the lender from you defaulting on your repayment obligations. Click here to read more. You also want to make sure that the repayments on your home loan will be affordable and within your household budget. Here is article I have written on building a simple household budget.
No matter what month it is, or what time of the year, maybe you can use the investment clock as part of your prediction as to where property prices are headed.
Before you go.. what time do you think it is on the Investment Clock right now? Have a guess and write it in the comments below. Then you can check in after a few months and see if you were right.