Private property issue #71 - Bottom of the market

Right now, most investors ask: “I agree it’s the bottom of the market … But how long do I have?”

• How long does the bottom of the market last? and

• Does it really matter if I wait 6 months till after the election?

It’s helpful to look at what happened in the past to get a sense of what might happen in the future.

Of course, history doesn’t repeat. But it often does rhyme.

The numbers will change – but the trends are often the same.

So, here’s what happened last time property prices fell in 2008.

#1 – Property prices can bounce back quickly

The last time property prices took a tumble was during the Global Financial Crisis (GFC) in 2008.

Auckland house prices fell 13.8%. Tauranga was down the same. Invercargill fell 17.5% and Christchurch 12.4%.

And let’s say you had the perfect crystal ball and bought at the bottom of each market.

How much would you have made 6 months later?

Auckland bounced back 4.2% in 6 months. Tauranga was 2.7%, Invercargill a massive 7% and Christchurch 4.1%.

That’s fast. But let’s put that into perspective.

The median sale price of an Auckland property is about $1 million today.

If you saw a 4.2% bounce back in 6 months, the median house would go up in value by $42,000.

It’s a lot of money.

The bounce back won’t happen exactly like that. But it gives you an idea of what’s possible.

What would happen if you waited 6 months in this scenario? In some ways, you lose our twice:

1. You’ve missed out on the bounce back ($42,000 in this case)
2. And if you now want to buy … you have to borrow more money to get an investment property – because prices have gone up.

#2 – Some areas will bounce back faster than others

Not all property markets bounce back at the same rate. Some will snap back faster than others.

One way to get a feel for which markets may bounce back first is how much house prices have fallen.

During the GFC, the areas with the largest price falls saw the biggest bounce backs.

It’s a bit like a rubber band. The further you stretch it down, the faster it springs back.

Bigger fall = faster return.

In 2008, Queenstown-Lakes District saw a massive 22.2% drop.

6 months later, prices were up 12.3%. That’s faster than any other major city in NZ.

Today, places like Auckland and Wellington City have seen some of the largest falls.

Auckland prices are down 23% and Wellington 24%.

If history rhymes, these places have more potential to bounce back faster.

To be fair, you could argue the opposite is true, though.

That prices in these regions fell the most because prices were too high.

That’s where you’d use our overvalued vs undervalued model as part of your decision-making.

Where will prices bounce back fastest?

My money is on Auckland bouncing back faster than Wellington. That's for all the reasons I usually talk about in this weekly newsletter.

At the other end, Queenstown, Westland and Southland will likely recover more slowly. After all, house prices haven’t dropped much there at all.

Just to be clear … this analysis isn’t the be-all and end-all. Don’t just blindly invest in Lower Hutt since house prices have fallen 30%, and expect a bounce back.

This is one factor to consider when choosing where to invest. It’s not the only factor.