Q. I am looking to buy my first investment property. I have been told that it is best to buy at the bottom of the cycle and sell at the top. However, someone told me to just buy “on the trend”. What does this mean and how does it affect me?
A.The term ‘property cycle’ is used to describe fluctuating property prices. Until recently it was generally agreed that these cycles occurred over roughly a seven year time frame, however economic instability has meant that cycles are now more sporadic. Property cycles do not affect all properties in all areas in the same way.
What this means for you is, if you can pick the bottom of the cycle then you could be buying a property at its lowest cost and hence lowest associated mortgage. When the cycle starts rising you may then be able to release this extra equity and use it for a deposit to purchase an additional property. If, on the other hand, you buy a property at the top of a cycle then you will be paying the peak amount.
If you are near the top then you won’t be gaining much equity and it will be difficult to negotiate a great deal on the purchase because there will most likely be a lot of buyers for the same property. Buying during a downward trend may work better when purchasing because you should be able to negotiate a better deal when there will be fewer buyers. However, if you do buy, you could be buying at a price that will be above the market value shortly thereafter.
Helen Collier-Kogtevs, managing director, Real Wealth Australia