You'll often hear people talking about how hot or cold the property market is, but how do you know what the market is really like?
One of the best indicators of the strength of the market is to look at how long properties take before they sell.
This is often called "median days to sell" because it indicates how long a property generally takes to sell from when it is listed.
Some assets are liquid which means they can be turned into cash quickly. For example, if you owned shares in the S&P500, you could sell them and turn them into cash within a few days.
Cash is the most liquid asset of all because it can be used to make payments at any point without having many restrictions, which is why many advisors would recommend holding a rainy day fund of cash to allow for a margin of error if anything goes wrong.
However, real estate is considered an illiquid asset because it can take weeks, if not months, to sell a property, making it difficult to turn it into cash quickly. The ability to sell quickly, though, is determined by market strength in many ways.
When the market is running hot, properties sell faster and thus can be turned into cash much quicker.
Therefore, knowing how liquid the property is will give us insight into the strength of the market.
If you look at the graph below, you'll see the median days to sell a property in Auckland, Wellington, and Christchurch over the past 20 years, and you'll notice that it's constantly changing. That's because the property market never sits still.
The easiest way to understand how days to sell indicates market strength is to look at some of the most notable events over the past 20 years. Take the Global Financial Crisis of 2008, for example.
In 2008, the property market went quiet, which is reflected in the graph above, with all three main cities of New Zealand recording days to sell exceeding 50 for some time. On the other hand, the hot market of 2021 had all three major cities recording days to sell around the late 20s.
It's impossible to forecast an accurate picture of the market. Still, by using historical data, we can form a reasonable idea of what we expect to happen.
The graph above is a good illustration of how market cycles work where there are patches of heat and then cool-down periods. Different cities also follow different cycles so following this pattern can lead to good insight into how an individual market is performing.
Vendors are less inclined to offer the best deals when the market is hot. So, take advantage of a quieter market and ensure you're on the receiving end of a bargain.
Knowing what the market is doing can be as simple as checking the days to sell in your area or asking your advisor how long a property has been on the market.
Then, use this knowledge to arm yourself and be best positioned to pick up your next investment property.
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