Tick tock, tick tock goes the Property Clock…
Like anything, property moves in cycles. You can gain a lot of insight into the market by knowing where in the cycle we are currently sitting.
Here at Ronovationz, we measure the different stages of the property cycle on the Property Clock.
So, let’s have a look at what the property clock is, how it works, what stage of the cycle we are currently at, and the anomaly in the cycle that Baby Boomers are causing.
What Is The Property Clock?
The property clock demonstrates the circular cycle of Property Boom, then slumping to a Recession period, and going through a Recovery period to once again return to a Property Boom. Here in New Zealand, the property cycle takes 10 years to complete. We have seen this play out pretty accurately over the last 50 years.
As the decade begins we are nearing the end of the recession stage, then in the twos (1992, 2002, 2012 etc.) we enter the start of the Recovery phase. This is a phase that lasts five years, peaking in the sevens (1997, 2007, 2017 etc.) From the eights through to the start of the new decade, we head into the decline or slump phase, until it starts all over again!
How Does It Work?
By anticipating what stage of the cycle we are currently at, then you can make an educated decision about buying investment property. Any time of the cycle is a good time to buy your family home, as that is a property that holds emotional value. But when it comes to investing, you need to be a bit more savvy and remove emotions from the equation.
It is important to note that you can buy an investment property at any time during the cycle, you just need to understand how the timing will impact your purchase.
When the cycle is in recession (example: 2018-2021) and the prices are dropping, then it is considered a buyer’s market. During this time, you should try to buy below the value of the property. At this stage of the cycle, the purchaser would instantly make money on the purchase date. Then you need to add value by renovating and upgrading the property.
If you don’t get the property you want at the right price, then move on. There will be another 10,000 properties in a great location that you could choose instead.
In the recovery portion of the cycle (example: 2012-2017), it is good to know that you buy at whatever price you can as it is considered a seller’s market. Still use your head when making a purchase during this period, you don’t want to overpay and you still want to be in the right location. At this stage of the cycle, you can anticipate that the value of the property will increase over the next few years - rental yield and equity growth along with it.
Understanding that the Recession period is a time to build cash flow, and the Boom time is when you get your equity gain takes the element of risk or chance out of the equation.
What Stage Are We In Now?
According to the Property Clock, New Zealand is heading into the Slump period. That will mean that property values will drop or flatten out.
Having said that, Auckland is in an interesting position. Never in the history of the western world have we seen a situation like this before, so it will be interesting to watch it play out. This slump period will be different to the previous ones because of the Baby Boomers.
There are 1.04million Baby Boomers heading for retirement. Through all stages of their lives, Baby Boomers have created a supply shortage and demand. When they were first born, there was a shortage of hospitals. Then, when they grew a little older, there was a shortage of schooling and Universities. As they grew older still, they triggered a major expansion plan in Auckland extending as far north as Albany and as far south as Pokeno.
The solution to the housing shortage in the 1960s was to expand. But that solution is not going to work this time around as there is nowhere left to expand to. So, that means the landscape of Auckland will need to change. If you can’t go out, then you have to go up.
Here at Ronovationz, we believe that within the next few decades, we will see the results of a changed Auckland. It is likely that every building within a 5km radius of the central city will be at least 4 stories high.
Why is that?
Because the usual natural attrition is not taking place. In previous property cycles, people would retire at 65, freeing up an employment opportunity and move into a rest home, or out of the Auckland area, freeing up their home. A new worker would move in and Auckland would keep up with the supply and demand of properties.
But, Baby Boomers are working well into their 70s and living well into their 90s. The same natural attrition is not happening. Baby Boomers are also creatures of comfort. They would rather stay in their oversized family homes with the lifetime’s worth of treasure they have accumulated. Downsizing or moving to a retirement village is just not a practicality for them.
What Does It Mean For The Property Cycle?
Technically we are due to head into a recession. But we don’t see that happening in Auckland. There will be plenty of employment opportunities as new properties are built (both residential and commercial), as well as upgraded infrastructure to handle Auckland’s population growth. Traditionally during a recession, there is less job confidence, but we don’t see that being the case.
So what does that leave you with?
Opportunity. Auckland is going to be moving to a unitary and high-rise plan. It will become the standard living arrangement for central Auckland. Now is the time to invest to capitalise on the ever-growing problem of Auckland’s housing shortage.
Even though there are opportunities ripe for the taking, you need to make sure you are investing in the right areas. That is where we can help you capitalise on your investments. Get in touch with us here at Ronovationz to talk about how you can safeguard your retirement by investing in property now.