Why investors need to focus on time in the market over trying to time the market
When investors think about purchasing property, most would like to buy low and sell high. Many assume boom times are the best time to be involved in property, with the prospect of some quick gains alluring to many.
However, seasoned property investors, know that it's not timing the market, but rather, time in the market, where you really make your money.
We can look at the history of the various property price cycles that have played out over the past few decades to see how this works in reality.
According to Domain, house prices do not go through wild boom and bust phases. We tend to see a period of gains (quite often surging), followed by a slight decline or flatlined pricing. The stats show us that on average, an upswing sees house prices increase in value by 32.7 per cent over the course of 2.75 years. While falls have been few and far between and on average are just 3 per cent over just three quarters of a year.
Typically, downturns have been just over one-quarter the duration of the preceding upswing. Prior to the current cycle, we can see that there have been four periods when house prices across the combined capitals declined annually since the early 1990s, during 1995-96, 2008-09, 2011-12, and 2018-19. Notably, all the periods where prices have fallen have been far smaller than what occurred during the upswing.
Looking more closely, we can see that the largest upswing took place between 2000 and 2004, and this resulted in prices rallying 76.4 per cent. The subsequent decline was just 0.5 per cent, followed by another rally of 30.9 per cent.
In general, periods of growth in Australia are long and steady, and declines are small and short.
When we look at this in the context of what's happening in the current market, we can see that we might be through the worst of the downturn. When the RBA started raising the official cash rate last year, that was clearly the trigger for house price declines across the country.
According to Domain, the value of Australia's housing market fell 5 per cent across capital cities in 2022. Sydney dropped by 10.9 per cent, and Melbourne was down 5.9 per cent. While Canberra and Brisbane house values fell by 6 per cent and 1.1 per cent respectively last year. Most of the damage was done by the end of the spring selling season.
That said, that small decline pales in comparison to the surge in prices that saw values increase 33.6 per cent between 2020-22.
Clearly, declines are small and the periods where values rise are long. Why is that the case?
There are many reasons why property prices in Australia keep on rising. The first and main reason is, of course, immigration. Australia imports more people than any other OECD nation and in the past 12 months, this has only increased further. They are planning on bringing in roughly one million people to Australia over the coming years. This is the equivalent of another entire city. This is putting huge pressure on rental markets and, in turn, is driving up demand for housing.
The second big driver of property prices over a long period of time has been falling interest rates. Back in the ‘80s and ‘90s, interest rates were pushed to extreme levels, marked by a record-high cash rate of 17.50 per cent in January 1990. Since that point, we've seen rates plummet to the lows of virtually zero during COVID. This has meant that people can borrow more, and that has translated to more money being paid for houses.
Armed with the information that property prices typically grind higher, what should investors be doing?
The first thing is that you are far better off not trying to time the market and simply just get into the market. Even if you purchased at the worst possible time in any market cycle, you likely would still come out ahead given the steady rise in values that we've seen.
However, there are some caveats here. Not all property markets are equal. While we're looking at the average across the country, there are still big discrepancies between different markets.
You only have to look at the likes of the mining-centric markets of Perth and Darwin to see that while prices do go up, they can take a long time. If you invested in Perth around 2013, it has taken you nearly a decade to see the value of that property increase. Compare that to buying virtually anything in Sydney at that same time, and you can see that the results are very different.
As an investor, your goal should not be to try and time the market perfectly. That's virtually impossible. However, you should be looking to invest in the very best markets that you can. If you can simply buy into a market that is better than average, then you should theoretically be able to outperform the average. And as we know, the average property price growth in Australia is pretty impressive.