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Interpreting lagging and leading indicators. Huh?

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No, it’s not witchcraft. Stats and data can sure help you gauge some idea of what will happen in the property market, though there are no guarantees. Accurately trying to predict a good investment isn’t an exact science and comes with all kinds of challenges.
The best thing you can do is group insights into both lagging and leading indicators to help you make a decision. So for starters, what is a lagging indicator and a leading indicator?
Lagging indicators typically measure performance over time and can confirm trends or changes in trends, while leading indicators forecast what may happen in the future.
Let’s examine them.
 
Looking into the past

 

Sometimes this can be heartbreaking. It’s like a trip down missed opportunity lane. But it can be helpful for your future too.
Home buyers and investors tend to look more at lagging indicators to identify long term trends in areas where they are considering purchasing. The most common lagging indicator being median changes in prices.
Performances on a yearly basis over the past five or 10 years can give you an idea of how resilient that market is over time and how it can withstand any kind of shocks.
You can look back over the last 10 years and see how the prices have moved with the changes around the country and world – financial crisis, global pandemic, the lot.
Many times you’ll see global and national economics don’t correlate with property price movements. That’s sure to surprise some people!
But wait, there’s more. This data isn’t just used for purchasing, it can be used to assess whether it’s a good time to sell. This is pretty important because you’ll want to make sure you’ve appreciated enough capital growth over time, so make sure you don’t sell prematurely.
 
Predicting the future
Now this tricky stuff. Maybe it is witchcraft. The more volatile of the two, leading indicators provide property watchers with an insight into the current state of the market and a projection of what to expect in coming months and years.
Economists like to look at it because it helps us see what can happen down the track. The most common indicator is interest rates – when rates are lower, more people borrow, the economy increases and it makes it cheaper to get into the market – in theory anyway. Eventually, this leads to an increase in property prices. Hello to a sellers’ market.
Another valuable leading indicator is auction clearance rates – they will give a clue to either a rise or fall in the market. For example, In Sydney and Melbourne, a clearance rate above 70 per cent typically correlates with a future increase in prices, while a rate below 60 per cent may indicate a fall.
Both auction clearance rates and interest rates will give you a good indication of sales in the future too. More available credit and rising demand results in stronger consumer (and home buyer) confidence.
Normally, as interest rates drop, up goes supply. The same is true for high clearance rates. Though there seems to be a bit of an anomaly at the moment – the interest rates are low and the supply is low too. Like already mentioned – it’s not an exact science.
This is where savvy forecasting comes in. Understanding the connection between lead indicators and human psychology works a treat.
Another indicator is the number of days the property is on the market. This acts as a guide to demand, growth and supply. Shorter time frames equate to higher prices – then that leads to increased listings as a follow on effect.
Although a greater number of available properties may bring relief to some buyers in today’s thin market, a rise in supply isn’t instantaneous and is unlikely to lead to lower prices within a meaningful timeframe.
Prices tend to spend more of the time rising than falling. So, even though you’ve seen this surge in prices and clearance rates, which brings on a touch more supply, it will be a while before prices drop. If they do. I doubt it’s coming any time soon.
 
Leading or lagging – which one is more important?
Insights from both the past and present can help you make a more informed decision. Just make sure you take a broad view on both. And of course, I’m always here to help, if you have any questions.