Fundamental vs. Technical Analysis
Residential property is the only market place not dominated by investors. For example, in WA only 16% of total value of lending is to investors (excluding refinances). It means one can have a competitive advantage. However just because people live in properties, they automatically assume they know property.
Of course, it is demand and supply that drives the price of any commodity including property prices, but there are so many elements of demand and supply – How would you know which elements to look for?
There are “causal” factors, which I call fundamental data, such as population movements, job growth, average wage growth, infrastructure improvements, new hospitals, gentrification etc. These may combine and lead to longer term growth, but they impact each suburb across the country differently. However, there’s just too much noise in just looking at causal factors that it’s impossible to use it to time the market accurately.
For example, looking at the construction of a new train line, when will it result in growth for the surrounding suburbs? Is it when it’s announced, when construction begins, on completion, or 2 years post when locals are raving about the shortened commute to work to their workmates?
As an investor, I’d much prefer to have an investment grow from day one – not kick off its run years later. Looking only at the “cause”, we can regularly select the correct where, but the when is much harder to work out. Fundamental analysis gets us only part-way with our property growth research. It can’t give any accurate timeline and is unreliable, especially in the shorter term.
Technical analysis is just like looking at the back-of-the-book “cheat sheet”. Consider looking at the answers: the “effect” first, rather than focusing on the “causes”. These are the impact of the multitude of causal factors in a particular suburb. Analyzing the effect data would be far more reliable at positioning a property buyer in a purchase just prior to imminent growth. Irrespective of employment, infrastructure, a new shopping centre, a university, each property market behaves in a very similar way. Time after time, the same signals of imminent growth appear, in generally the same order.
In general, I’m looking for:
- rents and yields increasing in a locality
- followed by an increase in sales volumes
- and then tightening of property supply.
Unlike the “Causes”, these “Effects” data can be measured, and a trend can be gauged, leaving us clues as to likely growth locations.
Crunching such a large amount of data nationally is the biggest challenge with technical analysis, and once you work out the right locations, it’s important to do further due diligence, on the ground observation, and empirical investigation. At street level, you need to then deduce the best pockets of the suburb to buy in.
It’s unlikely that the best growth location is right in your backyard, so I’m a big believer in counter-cyclical investing and being open to #BorderlessInvesting.
If you are about to jump into a property purchase, hopefully the above can give you more ideas as to what to research, and good luck to you. But then again, there are other ways to buy well where luck doesn’t have to feature in your success.