Buy Low and Sell High. This is a simple concept in theory but it’s a difficult strategy to execute in practice.
There’s no doubt that Melbourne House Prices are being affected by the global economic uncertainty associated with COVID-19. Nobody knows with certainty how steep price falls will be, or how long a likely downturn will last, but the below analysis can help you pick the point at which broad-based growth will return to the market. Purchase before it returns, and your investment property might be worth less in the months following, but wait too long, and you’ll miss out on some of the capital growth that will surely return to the market at some point.
How do you know when the market is bottoming out, or when it’s peaking?
Melbourne consists of over 400 suburbs. We segment them in a myriad of ways: by demographics, by proximity to the CBD, by the presence of top schools, hospitals, transport options, etc. The below map shows Melbourne suburbs segmented by Median $ House Price.
Those Investors who are familiar with Melbourne would understand this visual intuitively. The most expensive suburbs are predominantly located in the Inner East and along the water, with more affordable suburbs found in the middle west and north. Prices remain relatively high along the main freeway lines to the northwest, west, northeast and southeast. Affordability improves the further you go from the CBD in any direction.
How does this knowledge help in determining market peaks and troughs?
The below graph shows how prices growth in each Suburb Segment has fluctuated over time. Since 2001, the market has experienced multiple inflationary and deflationary periods, each different in duration and degree.
The first and most obvious insight is that all areas tend to move in the same general direction (e.g. when the overall market is rising, each segment tends to rise). This is a really important, basic concept to understand:
The best indicator of whether prices are likely to rise in a particular suburb is where the overall market is trending.
It is highly unlikely that prices in one suburb will trend upwards over a period of time while prices in all other suburbs combined are trending the opposite way. Suburbs within markets tend to move in the same general direction, but some move faster than others.
Comparing the average performance of the most expensive suburbs (Over $1.5m in bold blue) to that of the most affordable suburbs (Under $0.65m in bold red) leads to a very useful insight. When prices are rising, they tend to rise first, and most sharply in more expensive suburbs. On the flip side, when price growth falters, it tends to falter first and most dramatically in these suburbs. This graph goes a long ways to answering the question:
When will we know that the market has bottomed out and broad-based growth is returning?
