A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
The lesson property investors should take from share traders
The property market must feel maddeningly slow if you’re a stock broker. Theirs is a world of high frequency trades that are completed in milliseconds with retail settlement periods of just a couple of days.
The flow of information is just as frenzied as the trades. Participants sit at desks cocooned by banks of computer screens that stream multiple news feeds, scroll electronic ticker tape of hieroglyphic prices and project finance TV talking heads.
In contrast, the standard length of an auction campaign is a lazy 22 days and settlement then usually takes a slothful 60 to 90 days to complete. Our ticker tape is the auction results in the Sunday morning paper and we’re very happy to wait for monthly updates on key macro indicators.
The differing nature of the trading mechanism and information flow creates a marked variance in approach to new information. Buy the rumour, sell the news is an adage that epitomizes the mindset of financial traders. To survive, participants must be forward looking and price in news even whilst the outline of evidence is vague and yet to fully coalesce to wax-sealed fact. Waiting for crystal clarity is too late. Today’s official news is a stockbroker’s fish ‘n’ chip paper.
Meanwhile, the property market agonizes over what’s to come. Will the Reserve Bank cut interest rates? Will lending improve now the banking royal commission has completed? Will there be a change of federal government in May?
The comparative cautiousness of most property market participants is understandable and unlikely to ever change. Property transactions occur infrequently and each one is invariably a momentous event for the protagonist as the impact is long lasting. A stock broker executes more deals in an hour than you’ll buy homes in a lifetime, and she can reverse the decision in a minute.
This cautiousness of the home-making population represents an opportunity for property investors. When the fundamentals of the market turn positive, we are given several months to act before broad sentiment and then prices catch up.
A property investor who thinks and acts like a stock broker is seeing the green light to buy. The stock and bond markets have said ‘yes’ to the questions I asked earlier about interest rates, lending and the federal election. They have already bought and sold shares and government securities based on the likely impacts for various firms and the economy.
The clearly signalled interest rate falls and relaxation of credit will eventually be a brake on the property price falls of the last 18 months in Sydney and Melbourne and then the engine of new growth. Meanwhile opportunist investors are preparing to beat the potential grandfathered negative gearing and capital gains rules that may arrive by mid-year.
Of course, even if a property investor sees the signal to buy, there are still impediments to transacting swiftly that don’t concern stockbrokers operating in deep liquid markets. A prudent budget needs to be calculated and borrowings secured. The asset selection criteria are set, the search carefully undertaken, a target property identified and, finally, the nervous waiting days until the auction are counted down. Even with the best of tailwind, one is still looking at a minimum two-to-three-months period between commitment to act and contract signed.
So even if committing now to jumping in may feel impulsive, go boldly knowing the process would still be maddeningly slow for a stockbroker. Richard Wakelin