It doesn't matter what the property market is doing - booming, slowing or going sideways - I get asked the same question. "Where do you think the market is headed?"
So I pull out my trusty crystal ball, give it a good rub, and... Oh wait, no I don't. I don't use a Magic 8 ball or guesswork either.
Instead, I do my research….
Market Data
Now it's time to get stuck into looking at data, and this is where you need to break up the available information into two categories - drivers and indicators. If you’ve read or heard anything from the many market commentators, you’re most likely very familiar with the term Indicators, so we’ll start there.
Market Indicators
Indicators are great for telling you what's been happening in the market. They're designed to measure data collected from what's already occurred.
Keep in mind that a lot of market indicators can be used to review both macro and micro data (more later!), so you need to be clear about what you're looking for. Also, the type of data you want to see trending in the right direction can vary depending on your strategy.
The two main categories market indicators fall into are market sentiment and strategy specific indicators. Market sentiment has two parts to it - consumer sentiment and business sentiment.
Consumer sentiment looks at a number of factors, but how much people are spending at the shops is the main one. When consumers are confident, they're spending. If they're worried about losing their job because the economy is weak, they're more likely to save.
Business sentiment has a similar feel to consumer sentiment. Businesses that feel things are going well with the economy are more likely to expand, employ new staff, and invest in research or new equipment. If things are tough, they're more likely to contract and adopt a more defensive position.
So market sentiment is very much about how money is flowing through our economy.
Strategy specific indicators can be looked at from a macro level, but are generally of more value when you're looking at a specific area, such as a suburb. Mostly they revolve around property data such as listings, vacancy rates, sales prices and so on. Each one should be looked at in isolation, but when put together they give a good indication of how the local property market is tracking. They don’t give you any information about WHY it’s tracking that way though. That’s where market drivers come into play.
Market Drivers
Market drivers are the "why" side of the market. This is the data that tells you what's about to happen, because these are the things that make property markets move. They cause the effect measured by market indicators. Market drivers exist at both the macro and micro level.
From a macro perspective, some of the most useful information is what's happening with:
The economic strength of Australia as a country and the information behind that are your macro market drivers. All of the broad categories I've listed also have subcategories. Take population growth, for example. There are three main types of population growth drivers, and at times they're telling quite different stories:
Although these are important at a macro level, they're important at a micro level too. For example, look at what's happened since the NSW Government announced the Western Sydney Airport. It's had a huge effect on land prices and more in the surrounding region. Major infrastructure projects can significantly influence local property market growth.
As a Property Developer, though, you also need to focus on micro market drivers. Given the time taken to complete a development project, particularly one that involves construction of multiple dwellings, you need to feel confident that your numbers will hold up for a longer period. Strong market drivers in the local area are the key.
Some things to consider at a local level are:
Of all these different market drivers, there are three main ones:
I've already talked about population growth earlier, so let's delve into the other two.
Supply and demand is quite simple - how many homes are available in the market, and how many people want to buy them. A lot of supply with limited demand shows a flat or saturated market, in which case providing more of the same is a bad move. Limited supply with high demand for your product, however, is gold.
Supply can be broken down into three stages:
On the demand side, mostly it comes down to population growth. If there are more people moving into the area, then they need places to live. If the population growth is stagnant, then there won't be enough people to buy what's already available.
Purchasing power is a combination of lots of different things, including:
If someone can find a job in the area that pays well and interest rates are low, plus they can find a home that's affordable, they're going to be much more confident about renting or buying property.
As a footnote to market drivers at a micro level, just be aware that the most important driver data may be different based on what type of stock you're planning to create. Outer suburban land packages are a very different scenario to multi-res apartments.
If you want to better understand how to assess property markets and identify profitable development areas, our free 7 Step Development FORMULA course is a great place to start.
Macro and Micro
As promised, let’s take a brief look at the difference between macro and micro in relation to your research. Statistics and commentary in the media often talk about the Australian property market, which is incredibly generalised. That's a macro view - talking about everything that's happening across the board as if it's one, standardised thing. And for some market drivers, you do need to look at bigger areas to get a feel for shifts and changes.
But reality is that property activity varies at an absolute minimum from state to state, main city to regional areas, suburb to suburb within a city, and often in different areas of the same suburb. That's when you're looking at things on a micro level.
As a Property Developer, to a great extent you need to be focussed at the micro level, because that's where your next property development opportunity is going to be. But never lose sight of macro level data and commentary either, as that can often have a broader influence and flow through into the micro level. Successful property developers combine macro property trends with suburb-specific research.
Causation and Correlation
Finally, let’s take a look at causation and correlation. When you’re looking at data, it’s important to be clear about the difference between them.
Say you’re looking at two charts, which are both rising. On one you can see house prices rising, and on the other the population in the area is growing. Now, based on supply and demand principles, this is a case of causation - the growing population needs more houses, but there’s not enough, so what does get sold goes for a higher price. The population growth is one factor causing the rise in house prices.
Correlation, though, is when two sets of data are moving in a similar direction, but there’s no direct link between the two. So in this case you have the same graph showing house prices rising, and another graph that shows the rate of dog ownership in the area is rising. Both graphs are rising, but there’s no direct link between the two - one is not causing the other. That’s correlation.
Hopefully you now realise you don't need a crystal ball to answer the question "where's the market heading?"
Instead, your job as a Property Developer is to inform yourself about what's going on in the marketplace right now and how that's going to play out in the property market down the track, whether it be short-term or long-term. You also need to determine if it's a true cause, or an artificial one (eg government stimulus package for 6 months).
So bunker down and research the property market drivers and indicators. And stop asking me the question!
So I pull out my trusty crystal ball, give it a good rub, and... Oh wait, no I don't. I don't use a Magic 8 ball or guesswork either.
Instead, I do my research….
Market Data
Now it's time to get stuck into looking at data, and this is where you need to break up the available information into two categories - drivers and indicators. If you’ve read or heard anything from the many market commentators, you’re most likely very familiar with the term Indicators, so we’ll start there.
Market Indicators
Indicators are great for telling you what's been happening in the market. They're designed to measure data collected from what's already occurred.
Keep in mind that a lot of market indicators can be used to review both macro and micro data (more later!), so you need to be clear about what you're looking for. Also, the type of data you want to see trending in the right direction can vary depending on your strategy.
The two main categories market indicators fall into are market sentiment and strategy specific indicators. Market sentiment has two parts to it - consumer sentiment and business sentiment.
Consumer sentiment looks at a number of factors, but how much people are spending at the shops is the main one. When consumers are confident, they're spending. If they're worried about losing their job because the economy is weak, they're more likely to save.
Business sentiment has a similar feel to consumer sentiment. Businesses that feel things are going well with the economy are more likely to expand, employ new staff, and invest in research or new equipment. If things are tough, they're more likely to contract and adopt a more defensive position.
So market sentiment is very much about how money is flowing through our economy.
Strategy specific indicators can be looked at from a macro level, but are generally of more value when you're looking at a specific area, such as a suburb. Mostly they revolve around property data such as listings, vacancy rates, sales prices and so on. Each one should be looked at in isolation, but when put together they give a good indication of how the local property market is tracking. They don’t give you any information about WHY it’s tracking that way though. That’s where market drivers come into play.
Market Drivers
Market drivers are the "why" side of the market. This is the data that tells you what's about to happen, because these are the things that make property markets move. They cause the effect measured by market indicators. Market drivers exist at both the macro and micro level.
From a macro perspective, some of the most useful information is what's happening with:
- job creation or losses
- population growth
- purchasing power
- supply and demand
- major infrastructure spending
The economic strength of Australia as a country and the information behind that are your macro market drivers. All of the broad categories I've listed also have subcategories. Take population growth, for example. There are three main types of population growth drivers, and at times they're telling quite different stories:
- international migration (people coming from overseas)
- interstate migration (people moving to another state)
- births and deaths
Although these are important at a macro level, they're important at a micro level too. For example, look at what's happened since the NSW Government announced the Western Sydney Airport. It's had a huge effect on land prices and more in the surrounding region. Major infrastructure projects can significantly influence local property market growth.
As a Property Developer, though, you also need to focus on micro market drivers. Given the time taken to complete a development project, particularly one that involves construction of multiple dwellings, you need to feel confident that your numbers will hold up for a longer period. Strong market drivers in the local area are the key.
Some things to consider at a local level are:
- vacancy rates
- listing rates
- sales rates
- affordability of new product
- infrastructure being built
- development applications to Council
- demographics of residents
Of all these different market drivers, there are three main ones:
- supply and demand
- population growth
- purchasing power
I've already talked about population growth earlier, so let's delve into the other two.
Supply and demand is quite simple - how many homes are available in the market, and how many people want to buy them. A lot of supply with limited demand shows a flat or saturated market, in which case providing more of the same is a bad move. Limited supply with high demand for your product, however, is gold.
Supply can be broken down into three stages:
- number of development approvals (Council's appetite for growth)
- number of building approvals (how many projects actually get built)
- finance approvals (can someone get the money to build it)
On the demand side, mostly it comes down to population growth. If there are more people moving into the area, then they need places to live. If the population growth is stagnant, then there won't be enough people to buy what's already available.
Purchasing power is a combination of lots of different things, including:
- interest rates
- unemployment rates
- job availability or growth in the area
- housing affordability
If someone can find a job in the area that pays well and interest rates are low, plus they can find a home that's affordable, they're going to be much more confident about renting or buying property.
As a footnote to market drivers at a micro level, just be aware that the most important driver data may be different based on what type of stock you're planning to create. Outer suburban land packages are a very different scenario to multi-res apartments.
If you want to better understand how to assess property markets and identify profitable development areas, our free 7 Step Development FORMULA course is a great place to start.
Macro and Micro
As promised, let’s take a brief look at the difference between macro and micro in relation to your research. Statistics and commentary in the media often talk about the Australian property market, which is incredibly generalised. That's a macro view - talking about everything that's happening across the board as if it's one, standardised thing. And for some market drivers, you do need to look at bigger areas to get a feel for shifts and changes.
But reality is that property activity varies at an absolute minimum from state to state, main city to regional areas, suburb to suburb within a city, and often in different areas of the same suburb. That's when you're looking at things on a micro level.
As a Property Developer, to a great extent you need to be focussed at the micro level, because that's where your next property development opportunity is going to be. But never lose sight of macro level data and commentary either, as that can often have a broader influence and flow through into the micro level. Successful property developers combine macro property trends with suburb-specific research.
Causation and Correlation
Finally, let’s take a look at causation and correlation. When you’re looking at data, it’s important to be clear about the difference between them.
Say you’re looking at two charts, which are both rising. On one you can see house prices rising, and on the other the population in the area is growing. Now, based on supply and demand principles, this is a case of causation - the growing population needs more houses, but there’s not enough, so what does get sold goes for a higher price. The population growth is one factor causing the rise in house prices.
Correlation, though, is when two sets of data are moving in a similar direction, but there’s no direct link between the two. So in this case you have the same graph showing house prices rising, and another graph that shows the rate of dog ownership in the area is rising. Both graphs are rising, but there’s no direct link between the two - one is not causing the other. That’s correlation.
Hopefully you now realise you don't need a crystal ball to answer the question "where's the market heading?"
Instead, your job as a Property Developer is to inform yourself about what's going on in the marketplace right now and how that's going to play out in the property market down the track, whether it be short-term or long-term. You also need to determine if it's a true cause, or an artificial one (eg government stimulus package for 6 months).
So bunker down and research the property market drivers and indicators. And stop asking me the question!
