How to spot a cooling market

The first sign investors should watch out for is stock relevant to sales as a sign the market is cooling off.

“If stock levels are rising faster than sales are occurring, it is a sign that there are too many listings coming on or not enough transactions in comparison to those listings. That’s the first sign,” Mr Paliwal said.

Mr Paliwal also pointed to days on market as a sign of a cooling market, but advised investors not to have a uniform approach, look at its long-term average and where it is now.

“If a lot of people want something, they usually want it quickly,” Mr Paliwal said.

“I’ll give you an example. There might be an area in Sydney where 30 days on market is considered normal. 

“Now in a regional market, the normal number of days on market might be 50. So, we can’t look at it as a certain number of days equals hot or cold. We need to look at what its usual four to five trends are and how much below or above it.”

The researcher’s third tip is to look at the rental market as a sign of how the market is trending for investors.

“I know owner-occupiers are the majority of Australian owners at 65-70 per cent. However, 30 per cent is no small amount when you’re looking at a region as a whole,” Mr Paliwal said.

“If you start seeing the rental market a bit cool when you look at high rental days on market, high vacancy rates, high amount of stale listing, as a result, this might turn off investors looking to buy in the area. Yes, they don’t make up the majority, you might see that demand come off and it becomes cooler,” Mr Paliwal explained.

A fourth sign that a property market is going to cool in the future is to look at building approvals.

“Building approvals is a great way leading indicator. To give you an example, in some parts of the Rouse Hill region where building approvals over the last 15 months as a percentage of total dwellings in the area are up close to 20 per cent,” Mr Paliwal said.

“When you see the region have close to 20 per cent of building approvals in the pipeline, even if it is not cool now, there’s a very high chance in the next two years it’s going to become cool because there is such a large pipeline of properties being built.”

“Who is going to take up that pipeline? That 20 per cent is no small number. So, expectations of 20 per cent of people to come into the region with borders shut makes it hard,” Mr Paliwal said.

However, the researcher also explained that the type of buyer in the area is important when it comes to using the building approvals indicator.

“If the majority are owner-occupiers, great, they are preparing their move, it doesn’t matter how big the approval is.

“If it wasn’t owner-occupiers, then who is going to come in and rent out those properties? That’s where the question comes in and things start getting cooler than ever,” Mr Paliwal concluded.