The Property Clock

The property clock is often used to follow the property cycle, which circulates over a seven to ten year period, and is based on the relationship between interest rates, supply and demand, affordability/finance availability, and the cost of renting. It is seen as a useful tool by the experienced investors to aid them in determining the best time to strategically enter and exit the property market.

A property Boom, indicative of peak prices, is shown at the top of the clock at 12 o'clock, while a property Bust, is indicative of when property is at its lowest price, at 6 o'clock. The best time to invest in property, just after 6 o'clock, is during a rising market where it can dramatically lower the risk of investment.

An important point to remember is that the "time span" between a boom and bust market is on average three to four years.

The four quadrants of the clock can be better explain by looking at who buys & sells and what makes the clock tick (market move).

Boom Market (12 o'clock to 3 o'clock)

Who sells and why?

  • Smart investors - Off-loading and shifting into an asset class with more growth potential
  • Fortunate investors - Those "lucky investors" who were at the right place and the right time!

Who buys and why?

  • Inexperienced investors - Jumping in just as the band stops playing
  • First time buyers - Interest rates are low and entrance to the credit market is relatively easy

What moves the clock?

  • High economic growth rate
  • Very low inflation
  • Sustained low interest rates
  • Healthy foreign exchange rate and foreign reserves
  • Stock shortage causes increasing property prices
  • Increasing demand for property and high prices = sellers' market

Slump (3 o'clock to 6 o'clock)

Who sells and why?

  • Landlords - Rentals far below mortgage payments
  • Frightened Investors - Desperate to "get out before the bottom drops out of the market"

Who buys and why?

  • Novice investors - Believe the good times and rising prices will never end
  • "Must-buy" buyers - Relocating because of other circumstances
  • Cash flush investors - Can afford a large deposit which makes mortgage affordable

What moves the clock?

  • Slowing economy and anti-inflationary measures introduced
  • Rising inflation and interest rates
  • Credit not so readily available anymore
  • Property takes longer to sell
  • Lower sales volumes
  • Lower house prices and negative equity
  • Repossession of properties start increasing

Recession (6 o'clock to 9 o'clock)

Who sells and why?

  • Indebted owners - Trying to avoid repossession
  • Mortgage holders (banks) - Selling off repossessed properties
  • "Must-sell" owners - Relocating locally or emigrating

Who buys and why?

  • Cash buyers - Prices are low and no mortgage
  • Professional investors - Bargain prices and repossessed properties

What moves the clock?

  • Low business confidence
  • High exchange rate
  • Unemployment increases
  • Reduced disposable income
  • Reduced personal debt to income ratio
  • Credit crunch and banks squeeze mortgagors (borrowers)
  • Stringent inflation checks and rising interest rates
  • High interest rates drive house prices down
  • Minimal new construction
  • Property oversupply = buyers' market

Recovery (9 o'clock to 12 o'clock)

Who sells and why?

  • Rental property owners - Landlords getting dividends
  • Investors - miscalculating market peak

Who buys and why?

  • Experienced investors - Still predicting rising prices
  • General public - Increasing credit availability
  • Tenants - Afraid price increases will make later purchases impossible

What moves the clock?

  • Renewed business confidence
  • Market stabilizes
  • Employment increases
  • Interest rates and inflation declining
  • Increased disposable income
  • Improving personal debt to income ratio
  • Property becomes an attractive investment
  • House prices still low
  • Increasing construction
  • Increasing demand for property

Although this is a very simplistic analytical tool it is widely used by many investors. It is important to remember that it is not always the same "time" in every market and it is always advisable to gather the facts of the market you are considering and determining what "time" it is in that market.

The recent global slump we experienced and are still experiencing in many markets was unusually deep and long. The property cycle came to a complete halt; it was literally like taking the remote and clicking the pause button on the property market. We saw factors like global economic markets, business and investor confidence and finance availability inhibit the cycle’s movement.

In the market I work (middle class neighbourhood in the West Rand, Johannesburg, SA) we estimate it to be at around 8 o'clock, which signals the recovery will probably start in early 2011.

What you should do now:

Buy

  • If you need or want to upgrade
  • If you have extra cash to invest, buy a small second property (even if you can afford to use up your equity in your primary residence)

Sell

  • If you need or want to upgrade (even if you sell your current home at a lower price)
  • If you are drowning in your debt

Don't Buy

  • If you can't afford at least a 1% increase in your mortgage repayment

Don't Sell

  • If you are considering down-scaling
  • If you have investment properties which seem to be sluggish

Remember the market will move on and if you are careful you will have many more opportunities to invest and make money in the property market.

Article by: Caroline de Wet - www.remax2000.co.za