Many of us buy lottery tickets. Although we do not know who will win, we know that someone has to do it – and that this lucky could be us. The concept of luck is also found in the real estate market; many believe that investors who make their fortune quickly and immensely through real estate are simply lucky.
Waiting for a zone of "prosperity" can eliminate a risk, but it introduces it all the more dangerous. For example, the economic boom could be about to end and recent buyers might discover that they have paid far more than the market value in the suburbs, where prices are falling and nobody wants to buy.
Knowing the causes of booms allows us to predict the effects. If we know for sure what is causing the periods of strong expansion, recession and a slowing real estate market, we can confidently invest in booming areas and easily avoid the suburbs where prices are about to fall.
The good news is that we can make such predictions with confidence if we know what makes them happen in the first place. Some types of events can result in dramatic changes in prices and rents. The former are natural events, such as droughts or floods, and the latter are market-related events, such as the boom generated by retirees.
Each of these events results in predictable changes in local prices and rents. Thus, knowing where and when they occur, we can identify the location, intensity and duration of price and rent changes that will result. Let's examine each of them in turn and see how to predict the unforeseeable.
Natural Events and Their Impact on Property
While earthquakes and tsunamis are rare in Australia and we have no active volcano, nature sometimes affects our housing markets in different ways. Cyclones, floods, bush fires and prolonged droughts can delay local housing markets for years, but these markets eventually bounce back – and when they do, prices quickly pick up where they would have been. if the event had not occurred. ]
This usually means that prices are skyrocketing and many experts mistakenly interpret events as booms. These are rebounds, and once prices have been caught, local housing prices will tend to move in line with the broader market. However, knowing when and where such dramatic price hikes can take place allows investors to participate in their turnaround and to predict seemingly unpredictable.
The graph above shows the number of years that the real estate market has to take to recover from various types of natural disasters. You may find that even though markets are recovering quickly after a cyclone, they need a lot more years to recover from events such as droughts and bush fires. Let's look at the impact of each of these events on real estate markets to see why they are putting different periods in recovery.
Hurricanes form in the trough of the monsoon in northern Australia between December and April, with an average of 10 cyclones hitting the Australian coast every year. Fortunately, most of them avoid large populated areas and their impact is usually limited to damage to crops and transport disruptions. Our most recent hurricane was Yasi, which hit the north coast of Queensland and caused considerable damage to coastal towns such as Innisfail, Mission Beach and Cardwell.
Yet, as shown in Figure 1, housing prices in these cities all recovered in two years. This is because building codes in high-risk areas are stringent and houses are built to withstand all but the most intense cyclone activities. Although crops and vegetation were severely damaged, real estate prices tended to rebound rapidly.
Floods occur every few years in some of our coastal cities, such as Rockhampton, where they have little impact on housing markets because if they are not well received, they are widely anticipated .
The effect of these "periodic floods" on local housing market prices is shown in Figure 1. The reason that housing prices fall only slightly then recover after a few years , is the monitoring of the level of the rivers and the installation of systems of alert. to protect lives and minimize losses of stocks and property.
Flood damage usually does not result in building losses, as dwellings are constructed both to resist flooding and to minimize water damage. Once the waters have settled down and the cleaning done, the housing market is quickly returning to normal.
Bounces many years later
Unforeseen floods can result in total material loss and even tragic loss of life. Figure 1 shows how real estate prices fell in the flooded suburbs of Brisbane after the catastrophic flood of January 2011. The demand for housing then languished for many years until the trauma associated with this tragedy is gradually being replaced by more recent and enjoyable memories. Since then, housing prices in the busiest suburbs of Brisbane, such as Coorparoo, Indooroopilly, St Lucia, Rocklea and Yeronga, have increased dramatically, more than double the growth rate of the housing market. Brisbane as a whole.
Recent floods in Townsville will likely have a similar impact on housing prices in the suburbs affected, with the severity and extent of the floods being unexpected. It will take several years before the damage and trauma associated with such a terrible loss can heal, but we can finally be certain that the time of the housing market recovery will come and that housing prices will rise rapidly at their current level. the floods did not occur.
Droughts have an impact on many regional and rural cities in Australia and their impact on housing markets is another valuable lesson for investors. During the millennium drought, for example, housing prices began to decline slowly but steadily in the Riverland, Riverina and Murray / Goulburn areas. Figure 1 shows the collective decline in housing prices in these areas and shows that as long as the drought continues, price declines can be prolonged and severe.
While it takes several years for economic conditions to deteriorate in times of drought, it takes several years after the end of the drought for local housing markets to regain growth, but when rebound occurs it can cause a quick catch of the housing. price when prosperity returns. Such a rebound effect occurred in all of the above-mentioned regions, with prices doubling in one to two years as local economies experienced a new boom.
We are currently facing a severe drought in most of New South Wales, central Australia and southern Western Australia, as well as in most of Queensland until the recent flood. There is currently a pattern of economic depreciation and population decline in the cities of the region. The recovery of local housing markets will begin a few years after the end of the drought and we can expect a rapid rebound in housing prices.
The most serious and feared danger to homes and their occupants comes from bush fires due to their destructive fury, devastating entire communities lying in their path. Figure 1 shows the effect of the terrible series of fires associated with the 2009 Black Saturday in the property markets of the most affected cities, such as Marysville, Blackwood, Gembrook, Kinglake, Mount Macedon and Daylesford.
Housing prices have dropped rapidly and dramatically in affected areas, with some cities such as Marysville virtually erased. Demand for housing has remained minimal until cities are rebuilt and residents are fully recovering, which takes several years, as you can imagine. But then, when the forests regained their natural beauty and the confidence of buyers, house prices doubled in these localities in just a few years.
While it is possible to participate in the recovery of housing markets in devastated areas by buying property just before the demand increases significantly, some of us may not feel motivated to invest in these areas. It is good to know that we can also predict the unpredictable by investing in areas where price growth is a market-related event.
Market-related events lead to predictable price spikes
The doubling of real estate prices in Sydney and Melbourne over the last 10 years has given many potential retirees the opportunity to downsize by selling the family home and buying a home on the coast or in the United States. Backcountry, where prices are much lower.
This not only offers them a desirable lifestyle, but offers them a retirement nest egg. If there is enough demand from pensioners, it can lead to price hikes in the most popular retirement homes, and this effect is fairly predictable.
I have shown how this effect works in Figure 2 (below) by comparing the median price of a house in Sydney to that of Byron Bay from the early 1960s to the present day.
Byron Bay offers an ideal climate for retirees, is one of the most perfect spots on the east coast of Australia and has many local attractions, such as recreation, entertainment industry, folklore , blues and alternative festivals, as well as all the facilities that older people are looking for.
Retirees first discovered Byron Bay in the 1960s, which caused a surge in prices that continued until the early 1970s, when the median price of 39, a house in Byron Bay had been comparable to that of a house in Sydney The price growth then ceased because retirees could no longer afford to buy there.
Over the next few years, prices in Byron Bay have fallen relative to Sydney prices, as all of these retirees died and their homes were sold by the children and grandchildren who inherited them. In the early 1980s, housing prices in Byron Bay were half that of Sydney and there were few retirees living in Byron Bay.
The same thing happened exactly then, when a new generation of retirees discovered the beauty, the attractions and affordability of Byron Bay as a paradise for retirees. Housing prices increased until it was about the same as Sydney in the early 1990s, and again, when the oldest residents died, in the next few years the same comparative decline in housing prices has again occurred.
At the beginning of the new millennium, another generation of retirees discovered Byron Bay. Since then, prices have increased significantly compared to Sydney. Although the median price of Sydney housing has doubled in the last 10 years, the price of housing in Byron Bay has increased 25% more than in the past five years alone.
This is what I call the "Byron Bay Effect" and it tells us that now is not the time to buy a real estate investment in Byron Bay. Note however that in a few years, when the median price of a house will again cost about half the price of a house in Sydney, it may well be the right time to buy.
This example shows us that it is possible to predict the intensity of such booms, as well as their beginning, their duration and their end. There is not enough information available to accurately predict the unpredictability of natural events and market events, if we know how to use them.
John Lindeman
is a writer, educator and commentator on the real estate market and director of Property Power Partners
