Fundamental Analysis Technical Analysis 780x438 1

7 Property Investing Market Fundamentals

Whether an aspiring property investor considering taking the plunge or a full-time investor wanting to brush up your knowledge, this article gives you seven key property investing market fundamentals to consider.

1. Real estate cycles

Real estate is a cyclical investment. History shows that the property market in Australia moves through a cyclical pattern.

The Psychology of Real Estate

As the market passes through the typical ‘boom and bust scenarios, outstanding investment opportunities are presented to astute and patient investors with the tools and strategies to take advantage of the market conditions. Conversely, some investors who choose not to take a longer-term view may panic during financial volatility and uncertainty characterized by economic downturns.

Market Fundamentals

2. The impact of sentiment and confidence

Sentiment plays a significant role during these ‘bottom of the cycle’ periods. The real estate market can easily be talked down on rumors and adverse media reporting rather than reacting to factual data. Property investors must appreciate that the Australian market comprises countless micro-markets, each responding differently to various economic factors. During a downturn, there will always be property investment opportunities that buck the trend and can be a worthy addition to your portfolio – if you can find, research, and analyze them using accurate, timely data before the rest of the market.

Target the best-performing suburbs

An excellent way to target suburbs that contain affordable investment properties or properties with the highest yields is with the Real Estate Investor pack of Top 50 Suburb Performance Reports. As the market turns upwards, confidence returns, building approvals rise, and the situation quickly changes. Suppose an investor is courageous and clever enough to dive into the market towards the latter stages of a market downturn or bust. In that case, there are excellent prospects for substantial future capital gains providing the economic opportunities are also positive in the medium and long term.

3. The economy and timing

The health of the economy has a direct impact on real estate activity levels. The fallout from a struggling economy in one location is reflected in rising unemployment, as shown in this graph (source ABS). This can generate a population exodus to areas of better employment prospects and reduce demand for real estate where the economy is failing. As confidence returns and the economy picks up, this population movement can be reversed, and housing demand increases.

4. Impact of wage levels

Wage levels can also have a bearing on house prices and dwelling activity. When household income rises, there is a prospect of higher wage levels resulting in more demand for real estate. People may upgrade to bigger houses and better suburbs, and ultimately higher house prices can result. There are, however, usually many other factors at work at the same time. The more liberal availability of funds for housing in a buoyant economy will reflect increased demand and higher numbers of home loan approvals. With the loan growth, approvals come higher turnover of housing stock and potential for upward movement in house prices. Ultimately, price levels represent home buyers and investors’ ability to meet the affordability and debt servicing market. If credit is readily available and interest rates are low, the market flourishes, and prices increase with increased activity and demand.

5. Impact of interest rates

Interest rates represent your income as a depositor or your cost of funds as a borrower. The interest rate level will dictate investors’ capacity and enthusiasm to purchase real estate. Periods of high-interest rates can occur at the end of a long sustained period of economic growth and the subsequent inflationary pressure on the economy. The RBA (Reserve Bank of Australia) will steadily increase the OCR (Official Cash Rate) to slow property market activity. The increased borrowing costs eventually result in reduced buyer demand and sales activity in the property market, followed by lower building approvals and downward pressure on property prices.

When The Reserve Bank intends to improve housing affordability when interest rates are comparatively low. Buyer and investor demand will increase, and the market will receive new orders and put upward pressure on prices. When the economy slows, the RBA does the opposite and reduces the OCR. While the Reserve Bank sets the prevailing official cash rate, interest rates for home finance are also influenced by local and international market forces. Consequently, banks will require smaller or larger lending margins depending on market risk factors, creating additional volatility in interest rate levels.

6. Demand for credit

The demand for credit and the level of funds available for lending will impact rates. If the money supply is restricted to property developers and investors, it can suppress the property market and hold back growth longer, pushing up rents and rental yields in the short term.

Inflation Target Over The Long Term

With plenty of money to lend and intense competition amongst lenders, rates and lending margins will fall. High inflation tends to lead to rising interest rates. If the annual inflation rate starts to climb above Reserve Bank targets, the Bank will typically dampen down demand by raising the cash rate, and by default, home loan interest rates will increase. When the economy starts to slow, rates can be reduced to stimulate growth. The cash rate will unlikely rise in the next three years, as this recent quote from the RBA Governor would suggest. With a more deregulated and global financial system, overseas rates can also affect our interest rates. If local deposit rates are non-competitive, funds can move to more attractive deposit options in other countries. If Australian rates are comparatively lower, overseas cash will not enter our markets.

7. Currency fluctuations

Currency fluctuations will affect interest rates too. As the value of the Australian dollar falls, the Reserve Bank can act to reduce the money supply, which increases rates as available loan funds dry up. The theory is that higher rates will attract investment from offshore and support the currency. It’s a delicate balancing act – if rates are set too high, consumers start saving and stop spending, and a recession can follow.

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