How do you spot the top of a cycle - analyzing the state of the WA market

[stretchy]

I'm looking at the WA market with great interest lately. Since my interest in real estate is roughly a year old, its the first cycle that I have ever been aware of. Now all good things come to an end eventually and I am curious to know how people determine when a high point of the cycle has been reached.

I know this is far from an exact science but my tentative stragegy tends to rely more on riding the cycle rather than the buy-and-hold approach. So being able to intepret the signs is obviously important to me.

So far I am concentrating on a few metrics:

1) Affordability. The biggie - people wont buy if they cant afford and the crucial first-home buyer will stop buying. This is closely related to many economic indicators like average pay and interest rates. Looking at the data in the pdf below, it seems like WA has alot of play left in regards to affordability. I would start to worry once it reaches QLD levels, given the similarity of those two states. So far so good...

http://www.treasury.act.gov.au/snapshot/REIAHL.pdf

2) Inventory. Supply and demand - if inventory is rising then surely prices must start falling eventually. This seems like more of a leading indicator since it takes awhile for the effect to show up in prices. I havent found an easy source of this info yet, but anecdotal evidence shows a few "hot" suburbs in Perth with a large number of homes for sale. E.g: Any suburb south of rockingham. With so much to choose from, surely a buyer can be picky and have the upper hand in negotiation. However other suburbs seem to have almost nothing on the market, which is good for prices. From personal experience buying my PPOR, a shortage of properties for sale in your desired suburb really hits the scarcity factor and makes you more irrational. So maybe this indicator cannot be applied to the entire WA market...

3) Percentage of investors buying. This indicates to me the level of irrationality in the market. I am assuming a rational level of investor interest is 10-15% (again, anecdotal evidence picked up from reading - feel free to correct me) and unsustainable levels once it passes 30%. Right now WA is at 24%, which is beginning become a cause for concern but not too irrational.

http://www.reiwa.com.au/res/res-mar...5AC2-6E1A1A52D52E12C4-24-Jan-2006-03:21:52:46


So I am thinking the WA boom has got some time to run yet, but its definately in the latter part of the cycle. I dont see the merit in guessing how long it will last (too hard, and too dangerous). I just want to know how hot its getting

Since there are many people on this board who have already seen at least 1 cycle, what advice can you give based on my analysis? Is it too simplistic? Is there any use in attempting to predict the stages? I have heard from more than a few people on this board that the top always comes much more quickly than they thought... its a worrying though but hopefully I am concentrating on the leading indicators rather than the lagging ones.. (like median price)

Regards,
Steve

 

[rich ando]

Resources Anamoly

WA/Perth normally lags the Sydney/Melb markets so you would assume that it would have been dragged into decline by now, however, the economic prosperity provided by the resoiurces boom has created an abnormal cycle in WA.

My guess is it will continue as long as they (the miners) keep ploughing billions into new projects, from which the runs offs are huge and include demand driven increasing property prices.

The bulls would say there is 5yrs plus in it.

 

[see_change]

No one rings a bell at the top .

Sydney went on longer that I thought it would, Brisbane stopped earlier than I thought it would ( based on what happened in Sydney )

Affordability is a big key , but the market will always over shoot what is reasonable , and during the peak , people will pay by what any objective measure are excessive prices for properties.

Be carefull not to overestimate the impact that one factor can have on the market. If somethings not affordable or offers poor returns there are only so many people who will pay.

Five years ?? Bull Market ?? that does sound optomistic.

See Change

 

[Pete]

Excellent post, Steve, and also you've received excellent replies.

Without being helpful, the only answer to your question - IMO - is hindsight. One only knows when the peak was when shown by historical data after the fact.

Many commentators wrote off the market two or three years ago. Yet is hasn't slowed down really and right now the market is moving very strongly still. Both sales and rentals.

Once advertised, houses for sale or rent are being sold/leased quickly and at strong prices - even over the asking price. This to me is an indicator to me that the market is at a peak.

Note, "A" peak, not necessarily "THE" peak.

There are, as Rich Ando wrote, those who say there are many more years in this RE boom for WA.

There are many massive resource projects being announced/confirmed. From what I hear & feel there must be at least a couple of more years in the boom.

Five years might sound too long, but I wouldn't be surprised if it happens. There is tremendous demand here. This is a golden time for WA.

The important question then is what action you take to capitalise on the situation.

Regards & best wishes,

 

[stretchy]

Thanks for the replies. I know its a pointless to try and pinpoint "THE" peak of the market. My aim was more to determine the risk/reward relationship - i.e. given the point of the cycle, is it still a good time to buy a house. I dont believe the merit in holding an asset that will underperform for 5-7 years because it was bought at the wrong time.

Although the resource boom is definately a factor in this cycle, its not something I can really quantify. Yes, there are many people making a boatload of cash froom the mines and hence pushing up prices, but its going to reach a limit sooner or later.

It seems you guys are relying more on "soft" factors to analyse the market.. something that comes with a bit of experience I guess.

SeeChange, when brisbane stopped quicker than you thought, why did you believe it still had more legs? I can see affordability is pretty low for QLD, but still higher than VIC/NSW. Was it based on the performance of Sydney?


Since I am 25, and just bought my PPOR (hence completely broke ) its really an academic exercise at the moment anyway... I'm not in a position to capitalise on the boom, and probably wouldnt even if I did have a bit of leeway. Its too risky for someone just starting out to buy when the market is this far in the cycle. I could handicap myself for years waiting for values to catch up.

 

[Pete]

Sounds like a very sensible approach, Steve.

To echo Jan Somers' advice, buy when you comfortably can, and just keep doing that. With time, you'll be OK. This is a virtually fail-safe approach if done sensibly.

regards,

 

[see_change]

SeeChange, when brisbane stopped quicker than you thought, why did you believe it still had more legs? I can see affordability is pretty low for QLD, but still higher than VIC/NSW. Was it based on the performance of Sydney?
.

Yes.

Was comparing returns on comparable suburbs in Sydney and Brisbane.

In your situation I'd be looking at which Eastern market has previously best reflected the sorts of valuations that have been reached in Perth previously , and use that as a guideline as to where you think Perth will get too and use that as a target.

The thing about the Eastern Markets is there were plenty of people around predicting that the markets would keep on going .

See Change

 

[The Fence]

Once advertised, houses for sale or rent are being sold/leased quickly and at strong prices - even over the asking price. This to me is an indicator to me that the market is at a peak.

Spot on Pete !
This is the frenzy stage where clamouring, gazumping, and all the dirty REAgents tricks come into play. If it's at that stage now then it won't be long now...........
May only take a natural disaster or terrorist event or worse still some mind numbing Government intervention to kill it off for good (Bob Carr and Michael Egan had the trick in NSW with the vendor duty and abolishing the threshold on investment properties for land tax. Put everyone under the radar and many fled like it was the plague).

I also agree that WA does have something a bit bigger happening at the same time (resources boom) and this is driving the population growth and they are coming from the Eastern States, hence contributing to the downfall there.

I have noticed Perth and WA in general being much more high profile in the news, current affairs, and even down to service industries such as administrative duties in general. I seem to be calling WA phone numbers more and more when addressing different financial enquiries I might have.

So, it's become a popular place to move to, and not surprising the Peel area and south are the biggest beneficiaries due to the relative unspoilt (not for long) coastal lifestyle.
Hell, I used to go surfing down south every weekend back in the early 80's when living there and some beaches never had footprints on them most of the time. A real natural beauty exists there and it's hard to resist.
In fact I'm planning my move back there as well, sorry, but I have a mother and two sisters who've been there for 30 years and I like it there.

Anyway, it's certainly toppy right now so beware the halt because when it comes it bloody tough to sell and make your profit unless you have been through a couple cycles.

Cheers,
Thorpey

 

[Kieran]

Stretchy,
Do you mean the top of the Boom phase of the property cycle (i.e. the point of highest annualised house price growth rates?) or the end of the Boom phase of the property cycle?

I think you mean the end of the Boom so that's how I will answer.

The following information is summarised from my unique book on Property Cycles (published by Penguin Books 2004) which is one of the few books ever written specifically about the Property Cycle and is subject to copyright so PLEASE DO NOT COPY or RE-DISTRIBUTE or RE-HASH this information in any way, shape or form. My intellectual capital on this topic is recognised as 'ground-breaking' internationally (many statisticians believe so) and I have also protected the 'Property Cycle' concept by trademarking my property clock internationally.

My research has revealed that to accurately 'gauage' where any property market is in relation to the traditional property cycle you need to consider the collective Key Drivers of the Property Cycle.

The property cycle needs the 'gravity' of a combination of peaking and troughing Key Drivers to propel the property market into the next phase.
No single Key Driver in isolation will be responsible. It's a bit like a combination lock that needs the right combination to unlock the next phase of the property cycle.

Key Drivers follow a directional trend. For example a peaking trough is the point of the peak activity of a Driver (i.e. Population Growth rate reaches a high point (peaks) and then trends down until it ultimately reaches a low point (troughs) and then trends up again. This pattern is then repeated).
We cannot predict exactly how long each Key Driver takes to peak or trough but we get a very good sense when we consider them collectively.

Some of the major Key Drivers of every 'free' market economy property cycle and their peaks and troughs at the end of a Boom include:

Population Growth--------------- Already peaked and trending down
Vacancy Rates------------------ Reaches Trough (ie low) and trending up
Employment--------------------- Reaches Peak and trending down
Construction-------------------- Reaches Peak and trending down
Number of People Per Household-- Still trending up and yet to Peak
Return on Investment (ROI)------ Still trending down and yet to Trough
etc, etc, etc

I have studied historic property cycles in NZ, UK, USA and Australia and found that closely following the combination of these Key Drivers makes assessing and predicting the property cycle fairly accurate. Using my knowledge of this topic I was able to correctly predict NZ's Recovery and Boom in 2001-2002
and then track the cycles progress since then.

Yes - even when a so-called 'property crash' was naievely called by some 'self interested' parties in NZ back in 2004 I was able to tell my clients that the 'crash' call was clearly wrong because I was closely watching the Key Drivers to assess what was happening (ie not the headline grabbers for the sake of free publicity) and the Key Drivers CLEARLY signalled the Boom would continue for quite some time.

Whilst I haven't specifically monitored the WA Key Drivers, based on your collective comments in this thread it would appear to me that you are possibly near the TOP of the Boom but not yet near the END.

 

[markpatric]

I`m wondering can anyone tell me what was the average price in WA 3 or 4 years ago and what it is now?.
A house I bought in Brisbane a few years ago had sat at around $110,000 for many years previous to that, maybe ten or more, now it is around high $200`s, the market roughly doubled every 7 or 8 years as is the general rule, all told, almost to the dollar.
If WA has doubled in value in the general time frame I would say it is time to stop buying, simply because you need to make good gains in order to profit after fees etc, to get in now would be dicey considering what the other states have shown.
Like they say when it`s obvious your too late, follow the herds and you will probably get burned.

 

[Pete]

Thanks, Kieran.

My gut feel on the current WA market wrt your indicators - based purely on 'gut feel' and no statistics or data.

Population Growth--------------- Population still growing. Growth rate maybe slowing? (I don't know which is relevant.)
Vacancy Rates------------------ Low & will stay low for a while yet
Employment--------------------- Still growing
Construction-------------------- Going flat out, not decreasing
Number of People Per Household-- No idea
Return on Investment (ROI)------ Decreasing & near nadir

Also: rents are increasing; state economy is strong; inflation is low; interest rates are low; confidence is high.

If any of the above somehow conflict with your copyright, please advise & I will edit this post immediately.

regards,

 

[Kieran]

Thanks Pete,

Re my copyright concerns. I don't mind the discussion of my comments and these issues on this forum (Somersoft) but just do not want them copied and redistributed to others outside of this forum.

Based on your 'take' of the Key Drivers I suggets you are somewhere around Mid Boom'ish!

If that is the case then you should continue to see good capital growth in WA for some time yet.

I would love to hear the opinions of others too!

Regards
Kieran

 

[Pete]

Thanks, Kieran.

Remember, all, that I'm biased (or one-eyed?).

Maybe others have quite different perceptions of where the market is? Comments welcomed from others, please.

regards,

 

[Puppeteer]

From my limited experience, Pete, I'd probably agree with your synopsis of the WA market.

Certainly construction is unbeleivable at the moment. Try finding an engineer, brickie, painter or electrician at the moment. I've been trying to get a sparky for over 2 months now, and can't even get one over to give me a quote.

 

[yadreamin]

A buyers agent l know here in Perth has started to offer above the listed price for the "right" properties. One property last week that he purchased for a client was 10K above the asking price.He said this is happenening a lot now.

It seems to me that the herd is starting to stampede

When the builders catch up with their back orders l think we may end up with a huge over supply of rental properties.

The average wait for a new home to be built now is about 16 to 24 months.I see quite a lot of adds now with "owners willing to rent back".

There is limited stock for sale at the moment and its moving so quickly that one doesnt get a chance to do any research on individual properties.

To me thats a sign to back off.

Cheers yadreamin

 

[stretchy]

I like reading about the history of speculative manias (funny how humans never learn from their mistakes) and one thing you can always rely on is that its always the most crazy right at the peak. The behaviour people are describing is exactly what is putting me off from buying an IP.

The property and buildng shortages are going have a big effect on the psychology of the herd - once a resource is perceived to be in limited demand we all go a bit cuckoo in trying to get our hands on it

I have no doubt there is still money to be made in the Perth market - for those that are willing to accept the higher level of risk and can afford a loss if it goes cactus. For someone just starting out, I still think its crazy to buy now.

Kireran, your post raised some interesting points. I didnt consider the difference between the "top" of the boom and the end of it. I perceived them to be the same thing. Are you implying that once a top has been reached there is still further capital growth, abeit at a slower rate? I thought booms tend to finish quickly (always more quickly than everyone expects - we all think we can catch it in time...). Given the reletive illiquidity of real estate, I dont want to be caught trying to sell in a hurry.

Might have to move your book higher up the "to-buy" list

 

[tonyd]

Since I am 25, and just bought my PPOR (hence completely broke ) its really an academic exercise at the moment anyway... I'm not in a position to capitalise on the boom, ...

Steve, since you have a PPOR, you will be able to capitalise on the boom, just not as efficiently as with an IP.

A friend sold his PPOR last year and intends to wait a year or 2 before building. His real net worth is rapidly decreasing with his money in the bank.

Tony

 

[Pete]

Good thinking, Tony.

 

[Ace73]

Boom?

Certainly construction is unbeleivable at the moment. Try finding an engineer, brickie, painter or electrician at the moment. I've been trying to get a sparky for over 2 months now, and can't even get one over to give me a quote.

If I remember correctly this was exactly the same complaint folks had in Sydney at the height of the Sydney boom in 2002/2003.

Also remember what is driving the resources boom. Growth in China and India. If Oil prices continue to climb this will have an adverse affect on the worlds economy, hence less growth out of our biggest trading partners.
With Iran being refered to the security council this could bring about another jump in the price of oil. The world economy relies on a source of cheap and reliable energy, without it the world economy cannot grow.

 

[asdf]

If I remember correctly this was exactly the same complaint folks had in Sydney at the height of the Sydney boom in 2002/2003.

Also remember what is driving the resources boom. Growth in China and India. If Oil prices continue to climb this will have an adverse affect on the worlds economy, hence less growth out of our biggest trading partners.
With Iran being refered to the security council this could bring about another jump in the price of oil. The world economy relies on a source of cheap and reliable energy, without it the world economy cannot grow.

And I heard the BHP and RIOs of the world have site constructions that are yet to be started let alone used to full capacity by WA workers. Is this a 10 year resource boom and we're only in the 3rd year??