Six signs/ indicators of a market at or near the bottom?

July 13, 2011

When is the market at bottom? It is almost impossible to know for sure… There are some tell tale indicators to give clues.

It is important to get things in perspective though, and remember property is a medium to long term hold. (7-10 years plus).

As investors start to see alternatives to the extremely volatile stock market of late, property does provide many advantages to the investor and owner occupier alike, as you can see it and generally it does fluctuate to a lesser extent than the stock market, and offers benefits such as some tax advantages;

  • Tax free for an owner occupier
  • Negative gearing for investor

In addition to that you can add value to it, and live in it.

Six signs/ indicators of a market at or near the bottom?

1) Rental shortage– Rents rising and a shortage of good rentals. This makes it attractive for investors again.

2) Low unemployment– Whilst the workforce is stable this underpins a strong economy.

“Western Australia has recorded the lowest rate of unemployment in the country. The Australia Bureau of Statistics reports the unemployment rate in WA fell by 0.1 per cent in December to 4.4 per cent, equating to 1300 fewer unemployed West Australians. Nationally, the unemployment rate dropped from 5.2 per cent in November to five per cent in December”.

3) Shortage of housing– May be as much as 72,500 homes by 2020 short of demand according to the HIA. As at 2010 the figure is around 17,400 homes short.

“WESTERN AUSTRALIA. The trend estimate of the unemployment rate for Western Australia generally fell from 7.4% in June 2001 to 2.7% in September 2008, before rising to 5.5% in July 2009. The trend then fell to 4.3% in July 2010, before rising to 4.5% in October 2010. The trend has since fallen to 4.2% in June 2011.”
Source: ABS

4) Population growth – Some predict the WA population could double by 2050.

“Perth population to double by 2056: report. Updated March 05, 2010 19:11:00

A new report predicts Perth’s population will double by 2050, with an influx of migrants from both interstate and overseas. The State of the Cities report provides a snapshot of the 17 largest cities in the country with the aim of improving the liveability, sustainability and productivity of each one. It says Perth’s population is tipped to rise from 1.6 million to 3.4 million by 2056 with Wanneroo, Swan and Rockingham the fastest growing areas in Western Australia.”
Source: ABC News.

Perth is growing faster than most capital cities, with Queensland, so the future looks bright from a demand perspective. Well located properties close to schools, shopping, work and transport should perform very well. There is a fundamental shortage of housing, and as building approvals are down, there must be an eventual backlash in the form of price catch up.

5) Cost to build or develop is marginal as to whether it is viable for developers. Established homes selling below the cost to build/ replace. – That is the case now. Many established homes are selling for not much above land value. Often 20 year old homes have been depreciated down to zero by the buyers (It used to be 2.5% per annum or 40 years), and we often see near new home selling below what it would cost to;

a. Buy the land and pay stamp duty
b. Hold the land for the construction time
c. Build the home
d. Finish the home

Often we see no holding costs or finishing costs so the value is very high right now.

6) Low interest rates– Still low on historical standards. One of the big four banks is offering as at today 6.99% for 1 year (on their website). The average for the past 50 years is around 9%. Some analysts are predicting the Reserve may put interest rates down in response to what some think was too fierce and adjustment up in the first place. The very minimum appears a climate of relative stability for interest rates and low overall compared to historical averages. Many of us remember 18% plus rates.

SUMMARY: Value is high, if you want to buy/ move, it would appear that the future looks bright and property is a solid medium to long term buy. Jump in now!