You might often read real estate headlines like, “Now is the time to buy in…” Los Angeles or Miami or Dubai.
While these stories are typically based on recently released market reports that show what appear to be bottomed-out prices or a lot of new inventory, that data doesn’t tell the whole story.
Part of that is because market data is always backward looking, according to Liam Bailey, Knight Frank’s global head of research, meaning that it is reporting on what has already happened, leaving potential buyers “slightly behind the curve.” Oftentimes, by the time it’s obvious that the market has turned, he said, it’s six months too late to take advantage of the best deals.
“In an ideal world,” Mr. Bailey said, “buyers would be able to access some real-time data, including the number of prospective purchasers in the market. But unfortunately that sort of data isn’t published—or well aggregated—by real estate brokers.”
In addition to this mismatch between historic data and the current state of affairs, there is another facet of timing the market that buyers often fail to consider, and that is unexpected events that can directly impact prices.
“The fact is that you can’t change the weather or the exchange rate or a political situation,” said Gary Hersham, the founder of the London-based brokerage, Beauchamp Estates, of some of these unexpected events, which might also include tax increases, natural disasters and global unrest. “These are the sorts of things that are always out of a buyer’s control,” he said.
But that doesn’t mean all hope is lost, experts say, because even if you can’t time the market with any real precision, there are certainly ways for buyers to make a solid investment within an expanded window of time that will pay off in the long-term.
But first, some examples that explain why you can stop trying to time the market to perfection now.
Unexpected Events Can Happen Anywhere, Anytime
When it comes to unexpected events that can impact real estate markets and price stability, they typically fall into one of several categories, as follows:
1 - New taxes and regulations
One might think that new taxes or tax changes would only happen after some public discussion or debate, but that is often not the case, Mr. Bailey said, noting that “tax changes are generally difficult to foresee.”
Take for instance the up to 15% stamp duty land tax on U.K. property purchases that increased in 2014 and again in 2016, when an additional 3% surcharge was added for second home buyers, which has had a massive impact on the real estate market.
“That seemed to happen overnight,” Mr. Bailey said, adding that the reason for this abruptness was because if the government started pre-warning people about looming tax changes, it could prematurely distort market behavior.
In New York, an example of a tax change that was only discussed briefly before it was passed and implemented is the new mansion tax passed by the state this year that, as of July 1, added a progressive tax on properties $2 million and above, maxing out at 3.75% for properties that are $20 million or more. Previously there was a 1% mansion tax on all properties over $1 million.
This tax was discussed in April and May and signed by the governor in June, Mr. Miller said, which resulted in a surge of home buying in the $2 million to $5 million range. Properties that would have organically closed in August or September were pushed to close before July 1, leading to a 37% year-over-year surge in this range.
On the federal level, the Tax Cuts and Jobs Act of 2017, known as the SALT tax, wasn’t anticipated until a month before it became law, Mr. Miller said, noting that it was signed on Dec. 22, 2017, and went into effect a few days later on Jan. 1, 2018. “This one was not on the public’s radar,” he said, “and it was a significant tax that directly affected different regions of the country—specifically high-cost, high-tax locales including the Northeast and California.”
2 - Weather disturbances and natural disasters
This category of unexpected events is fairly straightforward, but the disaster in question differs by region.
In California, wildfires and debris flows have had a big impact on high-end property markets, such as Malibu and Montecito, in recent years. Earthquakes are also a concern throughout the state.
Meanwhile in Miami, South Florida or the Caribbean, “there could always be a catastrophic hurricane,” said Jay Phillip Parker, the CEO of Douglas Elliman Florida, adding that, “there’s always a risk that perfect planning doesn’t work. That’s just life.”
3 - Political changes or votes
When it comes to political changes or unexpected votes, an obvious example that comes to mind is the Brexit vote in 2016, which was unexpected, Mr. Bailey said, because the general consensus was that it wouldn’t go the way that it did.
“That was a surprise,” he continued, “which led to a weak period in London that no one could have predicted.”
Fernando de Nunez y Lugones, executive vice president of the Development Division for ONE Sotheby’s International Realty in Miami, offered a few more unexpected political changes that have impacted the international sales market in South Florida.
The first, he said, was the latest presidential election in Mexico, which resulted in a victory by the left party candidate, Lopez Obrador. “This has caused a significant outflow of capital from Mexico,” he wrote in an email, “as high-net-worth individuals in the country are concerned that the upcoming administration could limit capital movement, increase taxes and/or enter into a tariff war with the U.S. that might lead to the peso devaluation.”
Similarly, he said, this week’s election in Argentina, “where the opposition party won the primary elections by more than 14 percentage points” has caused an unprecedented devaluation of the Argentine peso and a sharp increase in the country’s risk spread, which could lead to more capital outflow from there.
These political changes could impact potential buyers by suddenly bringing new competition to the Miami market.
4 - Financial volatility and exchange rate fluctuations
Most buyers cannot predict when currency shifts will occur and how they might impact a purchase. For instance, as the dollar became stronger, it dampened international demand for New York real estate, Mr. Miller said. But after the financial crisis, when foreign investors enjoyed a significant discount, the opposite was true.
This same dynamic plays out in all global real estate markets, and can be incredibly difficult to predict, experts say.
5 - Global unrest
Depending on what is happening in various parts of the world, global unrest can cause a lot of uncertainty that trickles into the property market and has a negative impact on pricing.
For instance, right now the political unrest in Hong Kong, caused by ongoing pro-democracy protests and the U.S.-China trade war, is causing real estate stocks to plummet.
Similar unrest has recently caused market slowdowns in Turkey and other Middle Eastern locales, such as Dubai.
In all these cases, Mr. Miller said, regardless of the type, it’s important for buyers to remember that “market cycles often begin or end with an external event that no one saw coming,” he said.
But There are Things That Buyers Can Do
With these unexpected occurrences in mind, and the idea that often, they’re what led to the shift in a market cycle, experts noted several things that buyers can do in lieu of trying to predict the best time to buy with any precision, as follows:
1 - Study general market factors and make the decision to buy
“While the overall looming argument here is that no one knows what tomorrow brings,” Mr. Parker said, “I do think there are certain variables that collectively support the notion that you can generally time the market.”
For instance, he said, a potential buyer might look at Miami and decide that recent federal tax reforms put them in a good position to buy, and see that inventory is meaningfully less expensive than in the northeast; the quality of new construction is up to their standards; the influx of culture and restaurants and education meets their needs; and the amount of equity in the market calms any worries about irrational inflation.
“I think you can look at all of these elements and say, it makes a lot of sense for me to buy in Florida right now,” he said.
Mauricio Umansky, the founder and CEO of Los Angeles-based luxury brokerage, The Agency, generally agreed with this sort of assessment. “While it’s impossible to really read the market, there are signs that can make you feel intelligent and solid in your decision to buy,” he said, adding that there can be a significant disadvantage to overthinking the timing of a purchase.
For instance, he said, people who worried L.A. was in a bubble two years ago and stayed out of the market lost out on significant appreciation. “Those people are spending 15% more today,” he said.
2 - Be bold during a free fall
Another good rule of thumb is that if the market is in a free fall for whatever reason, get in if you can, Mr. Bailey said.
For instance, back in 2008 during the financial crisis, it was actually a good time to buy, he said, because you could make a bold offer and some sellers would say yes. “By the time the market stopped falling,” he said, “and sellers realized they were no longer in crisis, they were not willing to take those low ball offers.”
This is the period of maximum opportunity that professional investors and developers often wait for, he said. Unfortunately for most individuals, they’re not in a position to grab this sort of opportunity because they don’t have the capital.
3 - Forget flipping; view real estate as a long-term investment
Mr. Miller said that where individual buyers can get into trouble is when they look at housing as a stock that is highly liquid, and easily traded, or in real estate speak, a “flip.”
“For the typical homebuyer, real estate should be viewed as a long-term asset,” he said. Flippers and developers, he added, are the ones truly at the mercy of whether the market is the same, better, or worse when they finish their project. Everyone else can wait.
4 - Negotiate hard on multiple properties
Mr. Hersham noted that anyone who is motivated to buy well in London’s current market can take a simple tactic: negotiate hard on multiple properties and purchase the one on which they get the best deal.
“If a buyer isn’t fussy and chooses five or 10 flats or homes they like without falling in love with any of them,” he said, “they can negotiate on them all and look for their best advantage in this buyer’s market.”
5 - Try to relax. This is your home
When all is said and done, Mr. Umansky urged potential buyers who need a place to live for themselves or their families to get a good realtor that gives them real, honest advice, and just buy the home they want.
Sure, right now in L.A. there is a lot of overpriced stock in the market, he said. But that just means buyers need to negotiate hard and pass over any seller that won’t budge.
“If you’re buying a property where you’re going to be living with your family,” he said, “you just need to make a purchase, move on and live.”
By: Anne Machalinski
Source: Mansion Global