What approach are you using to make the vital decision of investing in the property market?
In my mind, there are two approaches that I use when researching and analysing data in order to make an educated and informed decision.
While both methods are important, the data used for each process will differ according to many factors.
In these unprecedented times, I have spoken before about the need to be using more than gut feel to make long term, financial decisions.
You should be using research, data and more important facts to make important, long term decisions.
Here are my thoughts.
Fundamental Analysis
In my mind, the fundamentals are extremely important when looking to invest in property over the longer term.
I would argue that fundamental analysis is what separates the educated investor from the speculative investor.
While there are many ups and downs and twists and turns in every property cycle, it always falls back to the fundamentals.
So regardless of the timing of the cycle, ensure that the inherited backbone and structure of the market you analyze is strong.
For me, fundamental analysis involves things like:
1. High Owner Occupier percentages
In locations where there are more owner-occupiers than investors, there is far less volatility and more predictability.
2. Weekly Family Income
In suburbs with a higher weekly income, people have multiple streams of income that allow them to ride out the difficult times and often get emotional and are able to pay more for property in the good times.
3. Land to Asset ratios
We are looking at areas where land is scarce and at a premium. We ensure it makes up a higher portion of the purchase price.
4. Supply and Demand (macro)
We look for landlocked areas where there is no more available land to build and combine it with areas where jobs grow and therefore population growth is considerably higher.
This fundamental analysis should form the platform and base for you to build upon.
Technical Analysis
Once you have a solid base set, you can then begin to fine-tune your analysis.Now is the time to use technical analysis to assist you with your timing.
Even for seasoned professionals, it is difficult to time the market, but understanding more precise data, it ensures we won’t get it completely wrong.
Some of the analyses here should include:
1. Auction clearance rates
This data is readily available and much more accurate in southern capitals, but studying short to medium-term numbers allows us to understand current market sentiment.
2. Days on market
When DOM begin to consistently get shorter, it may be time to buy. On the other hand, if DOM is increasing, it may pay to hold off.
3. Median House Price
Median house prices are published at least every quarter and can also give a good indication of where property prices are heading. There may be a lag factor here, so it is not as reliable as other forms like Asking Prices.
4. Supply and Demand (micro)
With technical analysis, we want to target the supply and demand of the specific area or suburb we are looking to understand these key micro factors.
Hotspots
I would argue that Technical Analysis alone is a big part of what analysts, commentators and media use to identify Hotspots.
They fail to understand and undertake full analysis by ignoring the fundamentals of the location.
As a result, today's hotspots become tomorrow’s NotSpots!
Look back on all the previous hotspots touted by the media and “gurus”, the Gladstones, the Port Headlands and Townsville’s.
While the short-term and current market data may have looked highly favourable, the underlying fundamentals were considerably less favourable.
Adding to that, the analysis then became clouded with things like emotion, gut feelings and FOMO and there were serious ramifications.
People lose hundreds of thousands of dollars, as they didn’t set a platform first and never considered the fundamentals.
In Summary
In the current market, it is the fundamentals you should be analysing and only when they look favourable should you undertake further technical analysis.
Start with some of the data above and study the incomes, demographics and supply and demand issues of the overall economy and drill down.
Technical analysis will also be difficult due to lower stock levels and buyer activity, but trends should still be noticeable.
Median Prices and other specific data may soften, but now is the time to monitor and take action as it starts to improve and head in the right direction.
By ensuring you use a combination of both forms of analysis, will ensure you buy the right property in the right location and also at the right time.
Perhaps creating wealth or investing is one of those things, but you do not know where to start.
