How can home buyers select the perfect time to enter and exit the real estate market, to make the most of their investment? We examine.
Much like the stock market, where investors try their best to time the market, Indian home buyers, too, constantly endeavor to time the market. When one reads that the housing market is on an upswing, the ‘fear of missing out (FOMO) often grips one’s investment strategy. When market speculators suggest that housing prices may drop, people rush to sell and/or put their buying decision on hold for a better deal.
Ironically, both, in the stock market and the housing market, the majority of investors fail to time the market correctly. It is, hence, a subject of discussion, if not debate, as to whether one can time the housing market.
What is ‘timing the market’ in real estate?
In theory, timing the market is the strategy of making buying or selling decisions, by predicting current and future price movements. Market timing is, hence, a prediction based on an outlook of the market and/or economic conditions derived from technical or fundamental analysis.
In his book, The Illusion of Control, Jon Danielsson mocks the attempts to measure and predict the risk and time of the market. Calling it ‘risk theatre’ rather than credible analysis, he maintains that to properly assess risk, we need to recognize that different investors care about different things, depending on their level of exposure and time horizon. Such accuracy looks impressive but bears little correlation to reality.
What is the best time to buy or sell a property?
Following the Coronavirus pandemic, Rachit Sheth, an accountant in Mumbai, waited for the property market to crash. He wanted to enter the housing market at rock bottom price, anticipating that the prices would crash, in a post-pandemic shock. However, he soon realized that property prices in Mumbai’s suburbs had strengthened and he had to shell out nearly 10% more for the property that he had finalized.
Rakshit Srinetra, a property agent in Gurugram, advised his clients to invest in Golf Course Extension Road. Equipped with the market fundamentals, aware of the fact that the Golf Course Road was becoming saturated and with information about upcoming infrastructure connecting the Extension Road, he could successfully time the market and help his clients to make a fortune in five to seven years.
Two friends, Raman and Sunanda, bought apartments in Hyderabad on the same floor of a project. Raman thought he could time the market but the housing market was stagnant in the Gachibowli area of the city. He exited after four years with a notional loss, calculated based on the holding cost of the property and the capital gain tax. However, by the time Sunanda sold her property over the next seven to eight years, prices skyrocketed and she sold her apartment with a net profit of 40%.
Timing the market: Factors to watch out for
Investors vs end-users: Differences in buying patterns
Aditya Kushwaha, CEO and director of Axis Ecorp, agrees that most people want to time the market for maximum returns. However, it is not easy to keep track of market cycles. Buying a home is a big financial decision but it is also an emotional one. People may put off buying for a while or deliberate on their aspirations. They may also look at choosing properties that they believe would appreciate better. “Underwriters and institutions can cut better deals as they are better informed about the market scenario and the requirements of a developer. For them, a good time to invest is when prices are expected to increase soon,” says Kushwaha.
Vinit Dungarwal, director at AMS Project Consultants, also agrees that it is the institutional investors’ game to time the market. According to him, it is difficult for home buyers to time the real estate market. Not all are looking at real estate for investment purposes. For some, it is about home ownership, as well. “Through the use of AI tools and predictive models, institutional investors can have a better understanding of trends and can better time the market. They use new-age platforms to keep a close eye on the variables and make investment decisions, based on the data they have at their disposal,” says Dungarwal.
Four phases of the real estate market cycle
The housing market cycle is closely interlinked with the macro-economy and the job market. However, the business itself has its micro-economy and demand-supply dynamics play an important role. One can never predict whether or not the housing market will do well, just because the overall economy is doing well.
Analysts the world over believe that the real estate cycle runs in four phases – recovery, expansion, hyper supply, and recession. For a home buyer, it is not easy to assess the phase, till the cycle comes to an end. Real estate cycles are unpredictable and not all four phases go through the same length of time.
Hence, most stakeholders believe that it is easier to predict the macro-level housing market but not the micro-level market. Thus, they advise home buyers not to speculate and time the market. Only investors with a better risk appetite and holding capacity can afford to time the market.