How important is it to buy a property at the bottom of the market?

Feb 12, 2019

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If you are contemplating investing in property, should you buy now or wait? What if prices fall further this year? Maybe you would be better off waiting?

As my analysis below reveals, buying for less than market value or at the bottom of the market (i.e. buying well), has very little impact. The price we pay for a property has little impact on success as investors. So, the desire to buy below market is probably driven more by ego more than fundamentals.

Timing the market is a flawed strategy

No one in the world has developed a reliable system for predicting how asset classes will change in the short term. As Mr Buffett says; “forecasters will fill your ears but never your pockets”. Therefore, if you think you can implement a strategy that involves picking the bottom of the market, think again! Not only is it impossible to do, but many of the indicators used to measure the health of the property market are lag indicators. That is, by the time the indicators change, prices would have already rebounded somewhat.

How important is it to buy well?

This is a good question and one that I have spent a lot of time analysing. I financially modelled a $750,000 property investment and measured the sensitivity to the following factors/assumptions:

Capital growth – this is the average rate of appreciation in value over the next 20 years. My base case assumption is a nominal rate of 7% p.a. (assuming an inflation rate of 2.5% p.a.). The range I used was 4% (being only 1.5% above inflation) and 10% (which I have observed in blue-chip locations over the past 30 years).
Buying above or under fair market value – I measured the impact of buying 10% below market value versus over-paying by 10%.
Capital gains tax (CGT) – I measured the impact of paying no CGT (e.g. owning in a SMSF) versus paying the maximum CGT (e.g. the ALP’s policy is to halve the CGT discount). The midpoint I assumed is based on current laws at a tax rate of 39% p.a.
Interest rates – my midpoint is 6% but I sensitised using a range of 4% to 8% p.a.
Rental yield – this is the amount of gross rental income you will receive compared to the properties value (expressed as a percentage). I have assumed a normalised mid-point of 3% but then also tested a range of 2% to 5%.
Rental growth rate – this is how much the rent will increase by on average each year. I have used a growth rate range of 3% – being slightly above CPI and 7% – which is relatively

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