Many property investors seek to buy when the market is low and sell just as it peaks — but trying to time the market can be risky and most get it wrong, new research shows.
The analysis by the Property Investment Professionals of Australia looked at every capital city market over the past 15 years to determine whether “time in the market” or “timing the market” produced the best capital growth.
It revealed the high transactional costs of buying and selling meant those who tried to profit from short-term jumps in property values rarely made as much money as those who kept their properties for longer.
PIPA chairman Peter Koulizos says most investors lack the skills or knowledge to select the best markets to invest in over the short-term.
The “best” markets for investing are challenging to pick consistently because they are constantly changing, he says.
“Trying to time the market is not only extremely difficult for most investors, the transactional costs of buying and selling multiple times, including stamp duty and capital gains tax, eat up a significant chunk of your potential profit,” he says.
“Most people are only thinking of the potential price uplifts when they try to time a market and naively don’t consider the inherent risks involved in such a market gamble.”
The research considered the capital growth results for an investor who purchased a $400,000 house in 2003 and then simply adopted a time in the market strategy.
The results ranged from capital growth of $588,000 in Melbourne to $324,000 in Brisbane.
Investors who tried to time the market but bought in the worst performing capital cities over each five-year period, were out of pocket to the tune of $137,701.
“For argument’s sake, if an investor somehow managed to select the best locations each time, sure, they would be ahead by $386,000, yet by simply buying and holding in many other locations their capital growth result would have been better,” Mr Koulizos said.
“On top of that, there is the stress of buying and selling three times in a 15-year period during which time market sentiment and conditions can change dramatically as well.”