A common question we’re asked as researchers at Blue Wealth is ‘What factors do you look at when analysing property?’ Unfortunately for you (but lucky for us – it keeps us employed!) there’s no short answer.
There is no one size fits all analysis when it comes to such a dynamic and emotion driven asset class. The analytical rules that apply to one city or region need not necessarily apply to another. Just last week, we conducted analysis on the relationship between sales volumes and price growth, taking a 15 year sample to ensure multiple cycles were included.
The results were surprising: although property growth rates in all capital cities were highly correlated with sales growth, the lag between sales and price growth varied wildly, from as little as 3 months to as much as 18! Similar results were obtained when analysing, among other things, interest rates, GSP and private capital infrastructure. In addition, the behaviour of the property market in response to changes in these factors differs depending on economic condition, with a clear delineation between the pre and post GFC period. Clearly, we need to take a vigorous approach when it comes to property market research.
The mainstream media is notorious for taking a very macro approach to the property market. Headlines like ‘Clear risk of Australian house price correction‘ (SMH 20 Jan, 2015) neglect the fact that property cycles need not move together. Yes, markets like Darwin and Sydney have approached 12 on the property clock, and these have largely contributed to the ‘bubble talk’ that has featured highly in property market commentary for the last 12 to 24 months.
On the contrary, Blue Wealth advocates both a ‘macro’ and ‘micro’ approach to research. As an example, when you look at our property clock Melbourne sits in that sweet spot between 6 and 7. Does that mean that Greater Melbourne (which has experienced double digit growth in parts) in its entirety is so positioned? No. Rather, Blue Wealth has identified micro regions within Melbourne: the inner west, south, and inner and greater north as examples that exhibit ‘opportunity’ and ‘value’.
This highlights the point made at the start of this article: a one size fits all approach to research necessarily yields poor results. Worse yet, investors become vulnerable to leaving potential opportunities by the wayside.