The property market doesn’t work the way that most people think it does. Discover what you really need to look for when you invest to ensure its growth.
When people talk about property market cycles, they typically refer to something called the Property Clock.
This clock suggests that the property market is stuck in an endlessly repeating loop. Starting at the peak, the market will decline and eventually bottom out. And from that bottom position, the market will start a recovery, begin to grow, and eventually reach a peak again.
Then, the whole thing repeats.
It’s a theory so widespread in property investment that it even made it into my book.
But hindsight has taught me something important…
The Property Clock does not show us how the property market works. In fact, I’ll admit now that I probably shouldn’t have included it in my book.
You see, while the Property Clock is helpful as a teaching tool that shows us what states the market can be in, it also implies that the market works in this perfectly circular manner.
It doesn’t.
In this article, we’re going to look at how the market really moves. Then, I’m going to show you what you need to look for if you want to invest in a property that’s set for real growth.
The Market is Like a Staircase
The property market isn’t like a circle.
Instead, it’s like a staircase.
Picture a staircase and you’ll get what I mean. There’s a line going up to a certain point. Then, it goes sideways for as long as it needs to.
That’s what happens with the property market on a general level.
We have a period of growth, followed by a levelling off period. Then, the market starts climbing again until it hits another point where it levels off.
And if you need proof of this, you can just look at how Australia’s property prices have grown over the last 30 years. That is, there’s a constant upward trend despite what happened during individual years or small periods of time.
Now, there are some exceptions to this. Places like Perth and Darwin don’t quite fit onto our property staircase.
But for the most part, the market isn’t going in the perfect circle that the Property Clock suggests.
It rises then levels out, only to start rising again.
So, my advice is to reframe your thinking about property market cycles.
Let’s now dig into what happens when the market goes sideways (again, this isn’t a perfect sideways movement).
For example, let’s say the market rises to the point where median prices hit $500,000 before we start moving sideways. During that sideways period, median prices may vary between $450,000 and $550,000.
However, you’re not going to see some massive and sustained slump, as the Property Clock suggests you would.
Eventually, the market will start to curve upwards slightly, just as you’ll see at the end of a flat step as it joins to the next step.
Then…
Boom!
The market will shoot up before flattening out again.
So, we have three distinct phases in the staircase model:
- Flat
- Upturn
- Boom
To better understand the idea, take the boom cycle for Sydney as an example.
The city started its boom in 2011.
It then peaked in 2017 before it started flattening out. And though we’ve had a bunch of environmental factors playing into that flattening, Sydney has already started to reach its upturn. The likelihood is that we’re going to see it boom again.
My point in all of this is that the Property Clock doesn’t give us a true representation of what happens in most property markets. That means it also doesn’t necessarily show us what we should be looking for as investors.
That brings us to the obvious question…
What should we be looking for?
Finding the Goldilocks Zone
One of the biggest problems I see with investing is that we’re taught to relentlessly chase properties in markets that are right at the start of an upturn. While this can work out, looking solely for signs of an upturn, such as rising prices, means you miss out on so much.
What we want to look for are areas on the upturn that also show signs of real change happening.
So, we want to see prices starting to go up. But we also want to see indications that there will be an investment into infrastructure in the area. We want to see lifestyle drivers that make the location more attractive to tenants or buyers.
The long and short of it is that we want to know that people want to be in that location.
Why?
We’re not just looking for growth when we invest.
We’re looking for yield, too.
We want our investments to generate a passive income that allows us to build equity, generate some profit, and gives us leverage for the next investment.
That brings us to the Goldilocks Zone.
Properties in this zone are the ones that you need to be on the lookout for. But how can you know that a property is in the Goldilocks Zone?
Simple.
You look for the biggest possible gap between rental yields and median house prices in a location.
When rental yields are high, you have a big indicator that people want to live in a location. They’re willing to pay more to live there, which means you’re going to generate a profit from rent.
Find the Sweet Spot
The Goldilocks Zone is the sweet spot.
It’s that short period when rental yields and median property prices are far enough apart to make a property a must-have investment. And this zone typically comes into being when a market is in its upturn.
The trick is that you don’t jump straight into buying when the upturn starts. Wait for the right moment and you can maximise your returns on your investment.
This is what the Property Clock doesn’t show us, which is why I don’t recommend it as an indicator for the market.
