In our third and final instalment of the Property Cycle, we’ve reached the happy ending – the boom.
While the Property Cycle is simple enough to understand, knowing what phase the market is in is an art rather than a science (although there is quite a bit of maths involved!). Here’s what you need to know to navigate this exciting phase.
The boom phase feels like party time. There’s a lot of excitement in the air, everyone is talking property and if you’re not in, you want to be. Most investors want to buy more during this phase, because it’s just so good.
New Zealand, particularly Auckland, has had really big boom phases where there is confidence everywhere, people don’t want to miss out, supply outstrips demand and we just can’t build enough houses. The boom phase is long due to demand both domestically and internationally. For overseas investors, New Zealand cities are still affordable, making them a very popular choice.
The boom phase is definitely a seller’s market, and while a lot of capital gains are realised, a lot of people jump the gun at the start of the boom and later realise they’ve sold too early. If you sell during this phase, you’ll want to buy straight away so you don’t lose too much if prices continue to climb.
Capital growth and the rate of capital growth is on the up in a boom phase and yields decrease as rents can’t keep up with increasing prices. In the last five years, we’ve seen a lot of people scared of missing out, especially first home buyers in Auckland. If we compare where we are now to five years ago in 2017, we have seen massive gains in lots of places.
In a boom phase, real estate agents can be difficult to deal with as they’re so busy and it’s easy to sell. We also see renovations increase, extra capital gains feeding the wealthy – they can borrow against equity to live as well as they can, spending more capital gains on holidays, cars, jet skis…so the banks get FOMO and are keen to lend.
Over last five years in our major cities, we’ve seen different cities boom at different times and the value of houses have increased by 80% on average compared to only a 20% average increase to incomes – this single fact has made it very hard for people to buy.
Evidence over the last five years shows if you buy early in a boom you get a lot of gains.
Christchurch is always behind Auckland and Wellington, but has the boom finished for Christchurch too? I’d say yes, and we will see some bargains this year as the credit crunch hits those who are highly leveraged and unable to settle sales or complete developments.
You can buy in a boom if you buy early. Buy and hold investors won’t sell too early and will replace their asset quickly and now is a good time to have a weed out, replace the old with some new.
In my view, property is still a solid long-term investment and any time is a good time to buy if you are in it for the long time i.e. more than ten years. But investors must put safeguards in place to continue to hold for the long term, and not be forced to sell early if something goes wrong.
In my opinion, buying an investment property is most likely one of the smartest things you’ll ever do and your biggest enemy in that endeavour isn’t another investor outbidding you or house price inflation, it’s procrastination!
I know it’s hard and can be frustrating, but so are most things worth doing. To succeed, you need to become an expert and growing your knowledge is paramount to ensure you invest wisely. Let me know when you get that next investment. I’d love to hear all about it.
An active investor with her husband Hamish, Claire loves to inspire & inform others, all whilst juggling three little boys and living her mantra to eat well and travel lots.