An Introduction To The Propertyology Wheel

Success in all its forms starts with vision – whether it be creative, financial or economic.

Consider Peter Jackson, the Oscar-winning director of the Lord of the Rings trilogy who had very few film credits to his name, but who had the vision to secure the rights to the books and to create one of the most successful movie franchises in history.

Likewise, Steve Jobs, whose visionary input turned Apple from a second-rate computing system into the start of one of the world’s most successful companies.

When it comes to property investment, vision plays a big role in the difference between success and failure.

What I mean is that you must have the vision, or work with someone who does, to look beyond the here and now and make an educated assessment on what property markets in particular locations will be doing at that time.

If a market is firing today, well, it’s too late for one to bother investing there because one will have missed a considerable chunk of whatever growth that cycle produces.

A New Perspective

I spend a chunk of my day, every day, with my head in numbers and spreadsheets reviewing a liquorice-all-sorts array of economic of property data sets.

In an ideal world, I’d love to be able to write a mathematical code which uses the millions of cells of data in Propertyology’s spreadsheets to predict the future for every Australian property market. Believe me, we’ve tried!

Related article: Data – what’s useful, what’s useless?

Years of experience has taught us that there are several factors which have a significant influence on property markets that aren’t numerical. There are dozens of metrics that Propertyology review through data, but there’s also dozens of man-hours spent every week consuming reports from a wide range of sources.

So, while there isn’t a magic algorithm, there certainly is a sequence of events which we believe in, a cause-and-an-affect approach, and a market cycle that we believe in.

Related article: Ticking boxes versus ticking the right boxes

Some folk who like following real estate reports are familiar with the “Property Clock” and the “Property Quadrant”. Such graphics pigeon-hole the property markets of different locations into upswings, peaks, downturns or troughs. While I think these concepts have some merit, they are too simplistic.

Property markets have lots of moving parts which combine to determine overall performance and the aforementioned concepts provide no elaboration about these considerations.

In attempt to invite property investors in to our behind-the-scenes analysis of property markets, I’ve created the Propertyology Wheel. This is a visual summation of the various components within a property market ecosystem and how they interact to determine property market performance.

The Propertyology Wheel has four phases: vision (where all good things begin), implementation, realisation, and adjustment.

From phase to phase, there’s often a distinct shift in the conditions in respect to broader job creation, government finances, construction activity (infrastructure and dwellings), consumer and business confidence, buyer activity, and property prices.

Plus, there’s no defined number of years for a jurisdiction to transition from one phase to the next, however, there are average time periods that can be used as a guide.

The wheel is applicable at national, state and individual city level. However, when conditions are good at all three levels of jurisdiction, property market super booms are likely (2001 to 2007 in large parts of regional Queensland, Western Australia and New South Wales are the best examples).

Of the three levels of jurisdiction, it’s the local level conditions which have the biggest influence on property markets.

That’s why, over the past few years, the property markets of many regional cities have performed well even though six out of eight capital cities were weak – Canberra and Hobart being the two exceptions.

The Propertyology Wheel [Unpacked]

As shown in the above graphic, there are five main influential forces – economy, confidence, buyer activity, property prices and construction. They all play a part in market performance.

Let’s start with the most important phase – vision.

Vision

One of the reasons why so few property investors act during this phase is that the indicators look a bit funky with weak construction activity, subdued buyer activity, low consumer and business confidence, and a flat property market.

However, as long as the future prospects for the location, which could be urban or regional, are promising – such as jobs growth, dwelling undersupply, major game-changing projects – this is the ideal time to buy while prices and buyer activity are suppressed.

Related article: Cities which transitioned from ‘gone’ to ‘great’

In essence, you will be one of the first people at the property party.

Implementation

The next phase is when the market tide starts to turn because the employment sector begins to strengthen, and major projects get underway.

Related article: Australia’s fast-improving (property) economies

At the same time, improved consumer sentiment starts to positively impact the property market, which in turns sees building approvals accelerate as well as property prices generally.

Realisation

This phase is when all of the five fundamentals are firing on all cylinders.

Building approvals are going through the roof, auction clearance rates are skyrocketing, and prices start to get a little ridiculous. It’s during this stage of the cycle that everyone knows about the market being hot and buyers become desperate not to “miss out”.

Alas, they already have! This stage is when the peak of the market is just around the corner.

Adjustment

The final phase is a bit like when you’ve drunk too much at a riotous party and you wake up the next day with a sore head, an empty wallet and wonder what the hell happened.

You see, the property “good times” create strong emotions amongst buyers – a bit like great parties – and some people get carried away ­­– again, a bit like great parties – and end up making poor decisions.

During the adjustment phase, there is (usually) an oversupply of dwellings which, when coupled with reduced buyer activity and declining confidence, causes property prices to moderate.

To keep the party metaphor going, this phase is the property hangover that was always on the cards when a mass of people get way too excited!

Wheel examples  

Hopefully now you have a better understanding of why I developed the Propertyology Wheel and the characteristics of each phase.

Let’s consider some “wheel” examples to explore further.

The adjustment phase can broadly be applied to Sydney and Melbourne from late-2017 through to mid-2019. Australia’s two biggest capital cities suffered from a massive property hangover (their biggest in 30 years) with their respective median house prices reducing by $150,000 and $100,000.

In essence, during 2016 and 2017, Sydney and Melbourne were experiencing the realisation phase, but not many people understood it at the time.

However, while most people were fixated by what these cities were doing, others were identifying lower risk, more affordable locations that were in the vision stage of the cycle.

In early-2014, Propertyology identified that Hobart had entered the vision stage and we began investing there.

I suspect that, if we had publicised what we were doing, everyone would have thought we had lost our marbles. In fact, there wasn’t a single property report or news article published during 2014 (or 2015) that had anything positive to say about Hobart’s property market.

Related article: Here’s why Hobart will have a second-wind

Other examples of locations to have performed well on the back of a strong vision in recent years include Byron, Orange, Newcastle, Geelong, Ballarat and Canberra.

Launceston, Burnie, Bendigo, Armidale, Bunbury, Sunshine Coast and Mackay are current-day examples of locations in their implementation states.

The vision stage is the most important stage. Those who invest during this stage get to pick the cream-of-the-crop properties and they position themselves to benefit from 100 per cent of the growth cycle.

The origin of the vision is traced back to the community’s leaders. That means governments, industry sectors, and major employers. What are their plans? Are those plans little more than flowery words attached to a colourful document or does one have confidence in the stakeholder’s collective abilities to deliver?

A city without a vision and an absence of strong leadership is akin to a sailor without mast. Perhaps the best modern-day example is Brisbane – a location which has had several solid underlying fundamentals for quite a few years, but no obvious grand plan, the community therefore isn’t engaged, and economic conditions have been incredibly uninspiring, much like its property market.

Related article: Brisbane, where’s your Big-Boy pants?

Buying property during the vision stage requires one to ignore the general consensus and to have confidence in what the fundamentals say. It means having faith that the various decisions made by community stakeholders will collectively result in improved economic conditions, followed by greater confidence within the community, and then an increase in buyer activity to drive property prices.

But, it’s impossible to set our calendar for exactly when that will be. As we all know, there are never any guarantees with market performance.

At the end of the day, property market forecasting is an exercise in predicting human behaviour. What could be more unpredictable than human-kind? For this reason, it’s unrealistic to expect anyone to get it right all of the time.  Here’s a summary of Propertyology’s forecasts.

Propertyology is Australia’s premier property market analyst and award-winning buyer’s agency. Every capital city, every non-capital city, we analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.

Here’s an example of some of our work for a client.