Why time in the market is more important than timing the market

When it comes to property investment, many buyers and investors become obsessed with the idea of?timing their property purchase?with the view that buying at the bottom of the market for the cheapest price is a formula for property success.

But that’s the wrong strategy to have.

In fact,?timing the market is one of the biggest mistakes?a property investor can make.

You see…?time?in the market?is far more important than?timing the market.

And here’s why.

Everything works in cycles

Australia has eight states and territories and the property markets in each location have their own?cycle, and then there are cycles within those cycles.

They all also vary in length and are affected by a myriad of social and economic factors and then, at times, the government lengthens or shortens the cycle by changing economic policies or interest rates.

The issue is that no one really knows, not even the experts, how long each cycle will last because it depends on a huge number of variables including economic conditions as well as human behaviour – and we all know how hard that is to predict.

CoreLogic’s data?is a clear reminder of the cyclical nature of housing markets.

The data reveals that over the past 30, Australia’s property market has seen six distinct cycles of growth and an equal number of cycles of decline (including the current downswing) across the national index.

Each of the upswings and downturns has been characterised by different environments and catalysts of change such as taxation policy, monetary policy decisions, economic shocks, fiscal stimulus, and broader economic conditions, CoreLogic explained.

What is important, however, is that while housing values move through cycles of growth as well as declines,?the long-term trend is undeniably upwards.

In Australia, national dwelling values have increased 382% over the past 30 years, or in annual compounding terms, have risen by 5.4% on average since July 1992.

That’s a significant increase.

Similarly, the following chart from Domain shows that the upturns of each property cycle are longer and stronger than the following downturns.

What property investors need to do instead

Instead of timing the market, sophisticated property investors understand that they need to focus their efforts on buying an?investment-grade?property, in an?A-grade?location at the time which suits them.

The important part of that statement is that they always buy “investment grade” properties in good locations because these are the type of properties that will outperform in the long run.

Smart investors don’t wait around for the lowest prices or for a downturn, they buy when they have their finance ready.

It can be tempting, especially in a downturn like we’re currently experiencing, to hang on and wait for prices to lower further with the idea that you’ll get more ‘bang for your buck’.

But the reality is, that investment-grade properties in good locations are more stable than in other markets and the point of the cycle is less important if you’re committed to holding the property long-term.

After all, it doesn’t matter when you enter the market if the value of your property will rise by 5.4% per year as it has over the past three decades.

What’s important is that you hold the property for long enough to see?compound growth.

This strategy would also help you to ride out any temporary market fluctuations.

That way, when it comes time to sell down some of your assets when you reach retirement, or whenever is the right time for you, you will have created wealth from your portfolio's compounding equity over the decades.

The risk is that by waiting for the ‘perfect time’, property investors risk missing out on time?in?the market which translates into money earnt, or they could even miss out on investment grade opportunities altogether.

What about the next property cycle?

As CoreLogic explains, forecasting where housing trends will go next is hard enough over the short-term, let alone over the long-term - 10, 20, or even 30 years.

Just because?property prices?have risen a whopping 382% over the past 30 years across the country, doesn’t mean we can expect the same figures going forward.

But the good news is that the long-term cycles we have seen can teach us a few things about the future of the market.

CoreLogic predicts that the declining trend we are seeing at the moment will eventually level out, typically followed by a period of stability and then further growth.

“Analysing each downturn across the combined capitals from the early 1980s shows the longest period of falling values has been 21 months, recorded over the most recent down phase (2017-2019) and also through the 1989-91 downturn,”?said Tim Lawless, executive research director at CoreLogic.

“For those that believe housing values double every 10 years, you might need to think again.”

He explained that none of the capital cities recorded a doubling in dwelling values over the past 10 years (the closest was?Sydney?at 97.6% growth), and over the previous decade (2002-2012) Perth and Darwin were the only capital cities to double in value with gains of 103.8% and 105.5% respectively.

“For those looking to double the value of their asset over a decade they will need to be outperforming the broader average,”?he said.

The bottom line

Remember, there are multiple property markets around Australia, and at the moment while many markets are experiencing falling prices, some are still growing, while others are poised for growth over the next year.

While, to some degree,?timing the market is important,?it is definitely not the key to investment success.

There’s a saying in property circles that goes:

“When was the best time to buy property? 20 years ago!

When is the second-best time – today!”

In other words, you buy when you can afford to and when you are ready to.

Because if you are in the financial position to purchase your next property currently I see a window of opportunity for property investors with a long-term focus.

This opportunity arises because consumer confidence is low and many prospective homebuyers and investors are sitting on the sidelines.

However, I believe later this year many prospective buyers will realise that interest rates are near their peak, inflation will have peaked and the RBA's efforts will bring it under control.

And at that time pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.

We saw an opportunity like this in late 2018 - early 2019 when fear of the upcoming Federal election stopped buyers from entering the market.

And look what's happened to property prices since then.

I saw similar opportunities at the end of the Global Financial Crisis and in 2002 after the tech wreck.

History has a way of repeating itself.

Strategic investors will take advantage of the opportunities our property markets will offer over the next couple of years maximising their upsides while protecting their downsides.

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