What’s going on guys Its Jordan de Jong here and welcome to my 3-part series on how to find an A-grade market, A-grade area and A-grade property, today I’m focusing on the A-grade market and how to identify a buyer’s or seller’s market. There’s a well known saying thrown around in the property investing game from none-other than one of the best investors of all time Warren Buffet, where he says “Be fearful when others are greedy and greedy when other are fearful” This statement is so simple, and many have interoperated it in different ways, one way to think about it is to stop being a sheep, following what other people’s tactics and strategies, If you follow the crowd you are going to get the same results as everyone else. Ultimately, this statement relates to price and value, which should never be confused as being the same thing. The price of something is what someone is willing to pay for it and the value is what you actually get. When “others are greedy”, the fear of missing out kicks in and prices start to rise above value where buyers are typically overpaying for an asset that holds less value. When “others are fearful”, prices start to drop below value as they just want to sell off the asset. These two reactions at both ends of the spectrum are mostly driven by our social groups, news headlines and media coverage all reporting the extreme worst-case scenarios so they can get the most attention. This results in the worst-case scenario being viewed as the “Predicted Future” and the sheep mentality kicks in to react irrationally now otherwise we could end up in a worse situation in the future. I’ve rode the data scientist hype train over the last 5 years and come to realisation that predicting the future is near impossible, all we really do is feed an algorithm with a ton of historical data and presume that the same trends in the future will cause the same results. The truth is when it comes to the Australian property market, there are so many sub-markets, economic activities, government policies, financial regulations and human emotions that significantly impact prices. Throughout this video I will give examples of scenarios that have affected the market in the 2017 to 2019 slump. One way to mitigate most of these market impacts is to hold an asset for at least a 10-year period, this way you’re not riding the waves of the cycle but sitting patiently and letting the capital growth compound over time. Although, there is a sweet spot in between the two extremes of the peak and bottom of a market that can be considered a safe zone to buy or sell an asset, for property investors the ideal is to focus on the buy zone as this is really where investors make their money. Preferably I would never want to sell a property as the cost to trade it is around 8% of the property value, I would only want to sell an asset if it’s something we call a “lemon” where the property hasn’t performed as expected and is costing more than its value in opportunity cost. Selling at the very peak of a market is generally when it’s the rockiest, and if a seller comes in too hot, they could over-shoot the peak and have to land somewhere further down the decline. Buying at the very bottom isn’t great either, everyone is scared and only the very desperate are selling their properties, stock levels dry up and it is very rear to get a good quality asset at a very low price. Property clock https://storage.googleapis.com/htw-website-uploads/391c74a8-htw-month-in-review-october-2019_residential.pdf Property analyst have tried to tackle submarket cycles with something called a property clock, I’ll go over Herron Todd White’s October 2019 National Property clock for houses as an example. As you can see at 12 O’clock we have Peak of the market, followed by declining market at 3 O’clock, bottom of the market at 6 O’clock and rising market at 9 O’clock. Different markets are then scattered around the clock to indicate their current cycle position, this is a much better break-down than what the media covers as the whole “Australian Property Market”, these markets should be analysed individually. Again, it’s always better to go as granular as possible, down to the suburb or even street market level, bigger markets such as Melbourne and Sydney cover many smaller pockets that are all in their own individual markets and cycles. Let’s go over some market conditions that are suitable to either buy or sell property, these will be just my interpretations and understanding of market cycles and should never be considered as personal financial advice. The safe zone to buy is when consumer confidence is recovering, if we look again at the clock this would be in the “Start of recovery” phase, at this point sellers are more confident to list their property and we should start to see some better quality assets being listed for sale. This position may feel like you have missed out on the bottom of the market and prices could have increased significantly in a short amount of time, However, picking the absolute bottom is almost impossible and the increased price now will be long forgotten after 10 years of compounding growth. The safe zone to sell in a market is when it experienced a period of strong growth of at least 10% per year for more than two consecutive years, because after every strong growth period there should be a price correction. On the clock this phase can be identified as “approaching peak of market”, again it’s almost impossible to pick the peak of the market, and it’s easy to feel reluctant to sell because we could be missing out on future growth. Although, as discussed before, if I was selling, it should only be for a “Lemon” property and if I have the opportunity to lock in a profit or to just break-even at least I can free up that borrowing capacity to buy a better asset and stop worrying about the opportunity cost. Economic activity also plays with the markets, some of the bigger indicators to watch out for are population growth, income & unemployment. Sometimes even other failing economies that are being reported on by the media portray a negative connotation with the global economy and diminishes consumer confidence. Population growth impacts the market because everyone needs a place to live, with consistent population growth, there’s an ongoing demand for supply and there is only so much land that we have available, ultimately increasing the value of the land. When looking at a specific submarket, I would look for consistent population growth growing at a faster rate than the whole region overall, always check population forecasts, markets with a low population growth forecast should be avoided. People won’t buy when they are insecure about their jobs, with an increase of unemployment & underemployment consumer confidence goes out the window, and the big expenses such as buying a house are the first expenditures to be put to the side. Increasing incomes allow people to raise their borrowing capacities giving them access to afford more expensive homes or to have more I the kitty to use on auction day, this often results in higher housing prices as emotional reactions force us to use the extra cash up our sleeve and overpay for a property. Government policies also toil with consumer confidence, we have seen a great example of this in the 2019 election, where the Labour Government was proposing to make changes to negative gearing and the capital gains tax policies. These two proposed policy changes halted property investors engagement in the market as there were changes that would have altered the types of properties they invest in, I wouldn’t be surprised if these changes where the main cause of the labour government losing the election. I want to know what other indicators you guys look out for when picking the right time to buy or sell in a property market, leave them in the comment section below. Some of the biggest impacts on market cycles are financial regulations, another statement thrown around in property investment is that investing is really a financial game, rather than a property game. Since 2014 APRA has required that all lenders must assess loans using the greater of either a 7% serviceability rate or a 2% buffer on the actual loan rate, On the 21st of May 2019 APRA removed this as they believed it is no longer required. This allows lenders to assess loans on a lower assessment rate, dropping the serviceability requirements for buyer, and ultimately increasing their borrowing capacity. From June to October 2019 we had 3 cash rate drops of 0.25 basis points each. These cash rate cuts are passed onto the banks, basically reducing the amount of interest you have to pay on your loans but also reducing the amount you earn from holding money in a savings account. This encourages the population to spend more money, rather than store it as savings, additionally, it stimulates the population to borrow more money at a lower interest rate to buy more expensive assets such as cars or property. Although throughout this video I have provided scenarios that affected the market during 2017 to 2019, these scenarios may not individually impact the market in the future, in saying that I’ll summarise with a comment from CBA economist Kristina Clifton to The Australian Financial Review. ""The Coalition election win, the Reserve Bank cash rate cuts and APRA's changes to serviceability metrics have seen the housing market turn around. We expect moderate dwelling price gains over the second half of 2019 and 2020"" Sometimes it takes more than one market driver to have a significant impact, although, in combination they can completely change market conditions, distil confidence back into investors, and stimulate the economy to spend more money. As always, seek your own professional financial, legal & property advice for your current situation, these videos are just my opinion and should never be considered personal advice. Until next time, happy house hunting.

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