How to get ahead through counter cyclical buys

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September 11 2020
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Property investors who are worried about falling markets are being advised that it could be an opportunity to grow their portfolio, so long as they can successfully execute a counter cyclical strategy.

How to get ahead through counter cyclical buys

In a conversation with nestegg, InvestorKit’s director, Arjun Paliwal, advised investors of the risks and rewards of counter cyclical investing.

Mr Paliwal explained how stock levels and buyer choices are the key indicators for an investor who is looking to purchase a property below its peak.

“An example of an area that may present opportunities to purchase for cheaper than peak, it is looking at stock levels because increased stock levels drive up days on market,” Mr Paliwal said.

The longer a property is on the market, the potential of a property falling to below its peak increases, helping the investor get ahead.

However, Mr Paliwal explained the importance of looking beyond the headline with a fall in city values not necessarily being an indicator of a counter cyclical purchase.

“Someone could have a distressed sale, but it doesn’t mean you get it for a good deal. Yes, their personal circumstances could be distressed, but if there’s low inventory levels, then there’s buyer demand in comparison to stock levels, then it’s likely you don’t purchase the property for a good price,” Mr Paliwal said.

“The key for investors looking to buy counter cyclical properties is to make sure there’s an increasing level of stock which allows more buyer choice, meaning it takes longer to sell, meaning greater discounting.

“If those things are occurring, you might find yourself in the position to pick up a deal. But the risk is you don’t know where the bottom is, so it’s just a decision you have to be OK to make,” Mr Paliwal said.

Despite falling property values in Melbourne, investors might still struggle to make a counter cyclical purchase in specific areas, Mr Paliwal explained.

“When I think about the impact on property prices [in Melbourne]. There was a moment in March where discounting was available as lockdowns and social distancing was a new thing.

“Since then, there hasn’t been too many opportunities even in Melbourne because of lowering stock levels.

“The refinance boom is a great way to look at it. When someone has been through a lockdown for the second time, sure it doesn’t get any easier, but responses as a home owner become less of a knee jerk reaction,” Mr Paliwal explained.

He noted that this could mean stock levels do not rise, which will hurt buyers looking to enter the market.

“You have to understand the human requirement for shelter. So, if someone really had to sell it, they don’t wait for lockdown. They try to not sell it, hence refinancing, and they still have to have a roof above their heads, so whether that means they go to a cheaper area, it all comes down to stock levels.

“If stock levels are on the rise, then you can get that discount now. So, there are pockets of Melbourne in areas like Wyndham and the west where stock levels are rising.

“But on the flip side, you have parts of Frankston and the Mornington Peninsula where stock levels are quite low and people are going there for affordability.

“So, I personally think if you were looking for distressed levels in Melbourne, it could happen now, but it depends on where you look and stock levels,” Mr Paliwal concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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