"The market is falling!" So why is it a smart time to invest in property?

Anyone who has watched the news in the last six months would likely have been confronted with fear-inducing headlines about property market declines. Attention-grabbing front pages and “special reports” about falling property prices in Australia have a lot of Australians worried. And property investors, or those thinking about becoming property investors, are now asking “when is a good time to buy” rather than “where is a good place to buy?”

The questions are related, and since DPN has observed several property cycles in our twenty two years in business, we thought we’d help put some of the headlines in perspective.

With the right advice property investing in a falling market makes sense

First, the facts. Yes, property prices are falling. But contrary to what the headlines or the ominous-sounding news bulletins might suggest, it’s not a nationwide phenomenon. Property prices in Sydney and Melbourne have indeed fallen in the last 6-12 months. But in the rest of the nation, falls are barely anything to note, with other capital city markets like Brisbane and Adelaide remaining relatively stable. Meanwhile, other regions have skyrocketed, such as Hobart, Canberra and Victoria (Melbourne excluded).

Annual change in dwelling values - broad regions of Australia.

So why the scary headlines?

It’s because our largest cities, Sydney and Melbourne have a much more significant effect on the average national property price. It’s like having a school subject where the assignment is worth 30% and the final exam is worth 70%. It doesn’t matter how well you do on the assignment; if you go badly on the more heavily weighted exam, your overall average will be lower. In this example, Sydney and Melbourne are the “exam”. And that’s not such a bad thing.

Property Market Context

Sydney and Melbourne might have fallen faster than other markets in the last short period, but context is critical in property investing. Over the most recent long-term cycle of 5-8 years, house prices in Sydney and Melbourne have grown much faster than the rest of the country. In fact, cast your mind back around 18 months, and the topic occupying a lot of sections of the media was the crisis in housing affordability in our largest cities, and fears of a lost generation who could never afford to buy their own home.

But by rising faster than the rest of the country for longer, these two large markets have risen more than the long-term average, and gotten well ahead of the rest of the country. The economic term for when this abnormal growth rate returns to normal is “mean regression”. But the simple explanation is that when something is well above an average rate, it is likely to fall back to it over time or “correct”.

No Such Thing as an Average

Which brings me to my next point. It’s easy to talk and write about the “property market” or even the Sydney and Melbourne markets. But that terminology hides a pretty obvious fact: there is no such thing as a single property market.

In fact, there are over 8,800 suburbs in Australia. And each of those suburbs has poor investment options, promising possibilities, and in rare cases, fantastic opportunities for the property investor who is willing to do the work to discover them.

We spend a great deal of time educating people that it’s individual suburbs that count, not headlines about housing markets. An attractive suburb with good infrastructure, in a location that will always be convenient to the CBD or beach, and with a strong community, will be attractive in any market. For places like that, the pool of buyers who will find living there attractive will always be there, regardless of overall conditions. The challenge of a property investor is locating these suburbs and then staying agile and well-informed on a local level to identify and act on the best opportunities when they arise.

In addition to these established gems, there are the rougher “uncut diamonds” in every city and region that, given some time and patience, will grow in prominence with buyers and investors. For those who know what to look for early, these specific suburbs have a powerful tailwind behind them in terms of capital growth and rental yield.

Never before has research and expertise been more important. Investors with the right tools and advice at their disposal can take advantage of markets like today to identify fantastic long-term opportunities that will deliver strong returns for years to come.

Source: Eight ways to profit from a falling property market