First published 20/02/2014
How do you know that the time has come to sell? Jeremy Sheppard discusses the factors to consider before taking advantage of your property.
Most investors only think about using the law of supply and demand only when they are looking to buy their next investment well. But supply and demand are also crucial to decide whether to keep or sell and when to do it.
It is understood that the prices of any product or service will increase if the demand exceeds the supply and decrease if the supply exceeds the demand.
To quickly assess the imbalance between supply and demand in the Australian residential property markets, I use the supply / demand ratio (DSR score) published at the end from this magazine. If you have not already seen it, go to page 102 to see what I am talking about.
The DSR score uses some of the best-known statistics, such as vacancy rates, bid settlement rates, yield, stocks. on the market, days on the market, etc. and the "munges" in a single digit called DSR score. The higher the score, the better the price growth potential.
Opportunity Costs
The purchase of a $ 300,000 property that will grow at 5% per year over the next two years instead of buying one that will grow at 10% per year will cost you $ 30,000 in lost opportunities (10% – 5% x 2 x 300,000). This loss is what most investors are focusing on. But the loss of the opportunity to hang on to a property in a rotten market can be almost as expensive.
Retaining a $ 300,000 property for two years in a flat market, while you could have invested money in a growing market of 5%, is not actually a $ 30,000 loss over two years.
By clinging to ownership, you avoid paying the costs associated with recycling your own funds. For this reason, many real estate advisers recommend that investors "buy and never sell". The recommendation "buy and never sell" has a big flaw. This defect is the word "never". Almost as soon as you say it, exceptional circumstances begin to occur to prove you the opposite. I sold properties that I bought with a plan to never sell. But when I sold it, it was perfectly logical. It all boiled down to numbers.
If supply is greater than demand, prices could fall only slightly – as a 5% drop. But it 's usually the time it takes the market to recover and start growing again, that' s the killer. Most markets spend more time flat than they fall. This is the time when you invest your money in a poor market while others are booming and that hurts – it's the opportunity cost.
It's time to synchronize the market
I admit that the more money you invest in the real estate market, the more wealth you will create because of the fundamental nature of compound growth. But this compound growth is not constant, it usually occurs in small outbreaks and is followed by long flat periods. You can accelerate the creation of your wealth if you know that the right time is a good time to enter and exit the market.
Investors who buy and hold liabilities who are considering never selling really risk their lives if they do not keep an eye on them. in their markets. On the other hand, the investor who wants to sell occasionally will have to be more vigilant, he will have to keep in touch with the pulse of each market on which he owns property.
SMSFs
I've recently seen a keen interest among investors for buying real estate in their super funds. Many rules have changed in this regard. Investors who follow this path will have to change their attitude towards super funds. Fund managers monitor their clients' investments. But we, the beneficiaries, usually have a rather passive attitude.
Once you own a real estate property in your super, you will have to change attitude and be more vigilant, by not giving the "right investment" and l '# 39; investment you make. thought it was.
When to Sell – Calculation of Costs
Whether to sell or keep is both simple and complicated. The simplest is that if the cost of opportunity exceeds the cost of recycling, you sell. The complicated part calculates all these costs with precision. You will often find that estimating future capital growth is the most inaccurate part of your estimate. And remember that you need to estimate the future capital growth of the property you own and the one you want to replace it with.
The DSR score does not accurately estimate capital growth. But it can be used as a very rough guide. The average DSR score for most of this year has hovered around 22 out of a maximum of 48. And the long-term national capital growth rate is about 6%. Thus, in a "normal" market, you can base yourself on a reference value of 6% growth and adjust it by a few percentage points depending on the DSR rating of your market, interest rates and general confidence in the economy. This will give you an approximate figure.
When to sell – to examine the market
If the DSR score of your market has consistently dropped over the last year, this should trigger an alarm bell. Similarly, if the DSR score is in the "very poor" category, you should be on your guard. Do some research and find out if something is blocking the demand, such as a council plan to transfer the area's landfill to your suburbs. Also, see if the problem has been an increase in supply. Check out the council website to see which development applications have been approved and which could bring even more supplies to the area.
Leases
To maximize the number of potential buyers of your property, it is best to leave it empty. Having a tenant can be a bonus for an investor, but a homeowner will usually want a vacancy.
It is important to do your research early before the market actually begins to slip, assuming it is. Do not forget that if the lease is long overdue, you can not just fire your tenant. Even if the lease is "periodic", you will still have to give two months notice to your tenant.
Check with your Real Estate Administrator what your obligations are in determining the time of your departure. Do not forget that each state has different rental laws and that each lease may have specific conditions. Here is a good plan that could save you tens of thousands of dollars. Ask your real estate administrator to call you back three months before the lease expires. When you receive the reminder, do not spend more than a month checking the status of the market and decide whether to sell or not. This will be two months before the end of the lease, which will give sufficient notice to your tenant.
Also, remember that once your renter is gone, you may need to make some alterations to the property before you allow it. inspections carried out by potential buyers.
Allow at least four months between when you start checking the status of the market and when you receive your first offer from a buyer. This highlights the need to act not only quickly but also to understand the future movement of the market ahead of the pack.
If the market was not in a good position to start and as it starts to slide quickly, it may be best to put the property on the market with a prepackaged tenant for the next owner . Waiting for the tenant to clear can actually waste valuable time on a declining market.
Cash Flow Considerations
The demand may be down compared to the supply, which is affected by the owner and the buyers. But as long as vacancy rates and returns are maintained, there should be no panic for sale for the cash flow focused investor. Of course, if the decline in demand for supply is related to the nature of the local economy, even real estate with a positive interest is threatened.
If you find that the DSR score of your market is down, take a look at which statistics are the cause. Are vendor discounts and market days increasing? Or is it the vacancy rate and the yield?
It should be noted that strong price growth, unaccompanied by rent growth, will lead to lower yields. This is nothing to complain about though. If you own property on this type of market, you have probably already benefited from some capital growth. Yields can increase because prices are falling. You want yields to rise because of higher rents, not lower prices.
Check the charts of recent courses to find the cause of the problem.
Item
Figure 1 shows a graph of the DSR score from January 2010 to October 2013 of the Coombaba QLD housing market. The values ​​of the DSR fell sharply in July 2011, then recovered slightly.
The DSR scores were somewhat volatile during most of 2010 in Coombaba, but enough clarity for the trend to be downward. The decline was significant enough to trigger a sell signal by the end of 2010. Note that a DSR score below 16 is considered "low" and that less than eight, is considered "very low". poor". It's not easy to sell between Christmas and New Year, but if you could sell between February and April 2011, the price would have been around $ 400,000, as shown in Figure 2.
The following year, prices plunged around $ 340,000 and remained there for about a year, while DSR scores gradually recovered. By mid-2013, the DSR score had returned to what it was in early 2010 and prices began to recover much of their losses.
The patient investor who chose not to sell would have saved recycling costs but lost opportunity costs. over two years. The more active investor would have sold and reinvested the money in a market whose value would have easily increased by 15% over the same period.
Note that the price of the US dollar began to fall in January 2010, but prices did not fall. The decline in the DSR began in July 2011, but did not reach a score of 15 until April 2013, when prices returned to approximately $ 400,000.
Markets in the doldrums do not fall significantly in price, despite a supply higher than demand. Instead, they tend to have periods of prolonged stagnation with only a moderate drop in price. Vendors wait for the market to recover rather than throw away their properties at a lower cost. The market is calm, but prices do not generally collapse.
The fall of the DSR in Figure 1 is earlier than that of the typical values ​​in Figure 2. This is explained by the fact that the DSR is an advanced indicator. When demand exceeds supply, the market takes time to balance, with price growth generally slowing demand. Similarly, when supply exceeds demand, demand takes time to catch up, usually once the excess supply has been absorbed or when prices have fallen enough to attract buyers.
Figure 3 shows the DSR for homes in West Melbourne. these last years.
DS homes in West Melbourne experienced some volatility in DSR scores from early 2010 to early 2013. There was no clear sell signal, although the DSR score has dropped to 15 points several times.
If investors had used the DSR score of 15 was a sell signal in June 2011, but they would have sold a house for about $ 800,000 (see Figure 4). Although prices reached $ 800,000, the typical value at the end of the month of October 2013 is about $ 600,000.
Given that the DSR has regained its balance, I would expect moderate growth in this market. But it takes a lot of growth to bring prices back to their level in early 2011.
Southport
In the May 2012 edition of Your Investment Property, I wrote an article about Southport in QLD. A senior executive from one of the big four banks asked me to review the Southport unit market in September 2011 because his sister had bought it a few years ago.
I did not even know where Southport was. the time and I did not have to do it either – a few minutes spent looking at the DSR and its indicators gave me a clear picture. The DSR score at the time was seven, which is very low. Figure 5 shows the price trend over the next two years.
As you can see in Figure 5, prices dropped by more than 10% and remained steadily low for almost two years, with the exception of a brief respite in mid-2013. respite is undoubtedly a statistical anomaly rather than a true capital growth.
Although the DSR score for Southport returned to 16, by the end of October 2013, part of the supply had yet to be absorbed before prices could begin to move towards the North.
Area Against Town
If you live in a city and have lost your job, you probably do not need to move, you just go to a new work address. But the loss of a job in a rural area can mean that you have to pack your bags and move out. This is one of the reasons why regional markets tend to be more volatile than urban markets.
A single industry losing steam in a city is of no importance to the real estate market. But in a region, it can be devastating. Regional markets may remain depressed for decades after the closure of a single company. But urban markets will rarely remain stable for 10 years, even if several companies fall back.
If the ratio of demand to supply falls in an urban market, there is reason to be concerned. But that does not necessarily mean that you have to put your property on the market. If you own property located in remote areas, however, you must quickly determine if the cause was to know if it is the "beginning of the end."
At the end of October 2013, I found 42 markets. across Australia who had a very poor DSR score. Only seven of these markets are located within 100 km of a major capital:
More than half of the markets rated and published each month by DSR are located within 100 km of a major capital. But less than a fifth of the very poor markets are within 100 km of a major capital. This confirms to some extent that urban market prices will be more sustainable than those of regional markets. They present a lower risk, but also bring lower benefits, while the regional areas present a higher risk but higher potential benefits.
Beware of these
Below you will find a list of some of the markets you may have heard of before and whose demand is currently very high.
All these markets have a very bad DSR score:
Watch List – Areas Where Demand for Supply Ration Is Low
Airlie Bear, Qld
Houses and Units
Poor Hedland, WA
Units
Bowen, Qld
Houses
Port Douglas, Qld
Houses
Docklands, Vic
Units
You can look at these markets more closely to see the features of what has happened and learn to know where you have investment exposure or in which you plan to buy. In most cases, the promoters became crazy and created a state of oversupply.
Airlie Beach and Port Douglas are examples of developers who take advantage of the fact that baby boomers are retiring for sun and sand lives during their holidays. Port Hedland and Bowen are examples of developers taking advantage of the resource boom. Docklands takes advantage of a brief price explosion in Melbourne in 2010, which is expected to continue, combined with increased interest from foreign investors due to the fall of the Australian dollar.
Inexperienced developers often forget the supply side of the market. equation and focus on demand. They hear big news in the media about a place and think they can not lose. They are quickly building three townhouses or a duplex.
Experienced promoters have already entered the market with a lot of promise. But their projects are much bigger and take longer. By the time they end up completing, the market may already be flooded by the stock of novice developers and the excess supply is now exacerbated.
Keep an eye on the markets you are regularly exposed to. Once the demand has dropped too much compared to the supply, it will be too late to try to sell. Rather than put yourself in a difficult situation, stay alert and be ready to make difficult decisions – quickly – as a professional investor and without emotion.
Jeremy Sheppard
is chief of research
on DSRdata and LocationScore
Can you afford to buy in this suburb? Find out how much you can borrow
