The idea of “timing the market” is an investment concept where an investor aims to purchase an asset when it has the most potential for future short-term growth. Timing the market may be one of the most influential metrics to consider when purchasing an investment. In doing so, an investor can aim to maximise their return on investment (ROI). Understanding where a market is within its cycle puts the investor one step ahead of the rest. Before explaining how to “time the market” there are numerous other concepts that will help to understand how to “time the market”. Consider the following in order to better understand markets and how they move over time:
Property cycles
The term property cycle refers to the movement of a property market as it changes in price. Over time, a property market can either be at the peak or trough of its cycle with periods of transition in between. Similar to a clock, when a clock strikes twelve it would be at its peak. As the hand of the clock moves, it can transition into a declining market (12-6), where the property prices start to decline and reach the trough. Likewise, it can also transition to an ascending market (6-12), where the properties recover and start to boom. During times of decline, the market can see negative or stagnant price growth, while periods of ascension can be identified with positive price movement. Understanding the movement of a market makes it easier to interpret where that market is within its cycle.
This is simply an illustration to depict the movement of a property market. Though, by understanding this concept an investor can focus on purchasing in ascending markets. In doing so you can ensure you are purchasing when property prices are rising. This will allow you to take advantage of a larger proportion of capital growth in the short term. Failing to do so can result in a buyer purchasing at the peak of a market or when a market is declining.
Markets within markets
Note that the property is not just one market! Property has markets within markets and therefore each market is within a different stage of its property cycle. This is why one particular area might be booming at the same time another area is heavily declining. Therefore, different areas across the country will represent different levels of value at a given time. Understanding there is more than one market allows the investor to diversify their asset pool and search for a wider range of opportunities.
So how do I time the market?
Timing the market requires an in-depth understanding of a particular market and its price movement over time. A market with strong price growth in recent years is likely to be approaching its peak. While a market that has sat flat for a period of time might be at the bottom of the barrel. To find a market that is getting ready to rise consider which market has begun to show signs of improved market conditions. Things to consider which indicate a rising market include:
- Increased demand– demonstrates increased buyers for the stock on market.
- Decreased days on market (DOM)– means properties are being sold quicker than before.
- Shorter auction clearance rate– means buyers are snapping up properties.
- Increased online search interest– puts greater attention on properties by buyers.
- Reduced vendor discount– sellers are less likely to budge on price leading to increased sale prices.
- Below average long-term growth– suggests a market has the potential to grow quickly in the short term if other criteria are met.
- Decreased vacancy rates– proposes there is less available housing for tenants and is an indicator of an increase in demand.
Each of these metrics is a key indicator in determining what is happening in a market. By identifying the movement of these metrics an investor will be able to determine which market is ready for future growth and they can purchase accordingly.
The verdict
You are likely not going to time the market perfectly. You might purchase a year into a boom or a year before it. That is okay, you don’t have to time the market perfectly to achieve a great return on your investment. Your focus should be on purchasing in a high-demand area where the market’s cycle suggests the area is primed for growth. Understanding this concept and its importance can help an investor decide where to invest and catalyse their success.
