Use Real Estate Hold Periods as a Supply Indicator

Real estate hold periods offer valuable insights into the property market, providing an indicator of supply by measuring the duration a property is held by its owner before being sold. A high hold period often hints at a lower supply of available homes on the market, making areas boasting such traits potentially lucrative for investors. Conversely, areas depicting shorter hold periods might suggest a market saturated with sale listings for established property.

Astute property investors have recognised the power of strategic long-hold investing. Indeed, many of Australia’s wealthiest individuals have meticulously built their fortunes through judicious and patient property investment strategies typically extending beyond a decade.

Overall, hold period is a helpful metric for investors to use when making decisions about which areas to invest in. By taking into account the level of supply in the market, investors can choose areas that are more likely to appreciate in value long-term.

Investor & Owner Occupier Hold Periods

Some of the richest people in Australia have gotten their money by investing in real estate and holding their property for longer periods. Most seasoned property investors would argue that the key to making money in real estate is to think long-term (at least 10 years) and to slowly build up wealth.

However, according to the recent research paper by NSW Treasury, investors frequently sell their properties just after 5 years. On the other hand, the most likely time to sell for owner occupiers is either after 5 years or 57 years.

In simple terms, the graph indicates that people who own their homes are more likely to either sell them after a short period or keep them for a long time. On the other hand, investors are more likely to sell them after a few years.

It’s obvious that owner occupier transactions are more aligned with lifecycle events. For instance, many retirees chose to sell their properties and relocate elsewhere, which explains the second spike of owner occupier hold period at 57 years.

Interestingly, there is very little sale activity in the 20-40 year range for owner occupiers. This demonstrates that at this stage of the lifecycle many home owners focus on things such as family, full time employment (and mortgage repayments) and are less prone to sell their established residence.

Because there is no lifecycle dependency, investor owned properties exhibit a different behaviour pattern, with the majority of sales occurring in the 5-30 year range. However, many investors in NSW chose to sell their properties just after 2-5 years, which in many cases is not a long enough timeframe to achieve maximum capital growth returns.

It is possible that the 2-3 year hold period is the result of “house flipping” activity. In addition, the peak of 4-5 year peak can be explained by unprecedented price growth in recent years. This may have prompted many investors and home owners to capitalise on this once-in-a-lifetime opportunity and sell their investment properties sooner than planned at the peak of the cycle.

Hold Periods for Houses in 6 Capital Cities

Investors should be aware that the real estate market is cyclical. Hold periods will fluctuate over time, depending on economic conditions.

For example, during a recession, there may be more properties on the market and a lower hold period. While during a boom, there may be fewer properties on the market and a higher hold period.

We’ve visualised the historical hold periods for houses in Adelaide, Brisbane, Canberra, Melbourne, Perth and Sydney on the graph below.

Melbourne and Brisbane are the most tightly held markets in the country. The 2022 hold periods for these 2 cities are reported as 11.0 and 11.8 years respectively.

On the other side of the spectrum, Perth and Adelaide are the least tightly-held markets with 7.2 and 8.3 years respectively.

It’s also important to consider historical trend for this metric when researching the supply levels in a particular property market. We can see that the hold periods for houses have been on the increase in all Australian cities since 2008.

Interestingly, there was a noticeable dip in hold periods for Perth and Adelaide in 2020 and 2021.

This is most likely caused by the pandemic with both markets showing the return to pre-covid levels in 2022. This also coincides with the nationwide property boom, when house prices soared in late 2020 and throughout all of 2021. Could it be that many home owners decided to take advantage of the booming market and sell their properties sooner than planned?

What About Hold Period Data For Units?

The graph below illustrates the hold periods for the unit segment in the 6 capital cities. We can see that at the high level units generally have lower hold periods than houses.

Furthermore the most tightly held city for units is Melbourne. It has 2 year lead ahead of Adelaide, Sydney and Brisbane where average hold periods are at 8 years. Historically Brisbane units had the same hold levels as Melbourne in 2016 and 2017 but diverged to much lower levels starting from 2019.

Perth units are the least tightly held real estate at just 7 years in 2022. However this has not always been the case. Perth was ahead of Canberra and Sydney up to years 2018-2019.

What Insights Can We Derive From Hold Period Data?

There can be several explanations for why people are holding onto properties for longer.

One is that the increasing house prices and associated costs have made it more expensive to buy and sell houses. For instance stamp duty (a tax on purchasing property) has also increased as the prices have risen over the last decade. This, in turn, may have caused fewer people to buy and sell property, and has lengthened the amount of time people hold onto their homes.

We have also observed that several markets had a shift in trend for hold periods some time in 2019-2020, which coincides with the beginning of the housing market boom in Australia. This may indicate that many owners decided to capitalise on higher house prices and sell at the peak.

Lastly, as the markets are cyclical, so are the hold periods. We can see that in some markets this metric correlates with the house prices, whereas other markets have an inverse correlation to house prices. For instance, in Perth rising house prices resulted in lower hold periods, whereas falling prices caused the hold periods to be longer.

Conclusion

On the grand scale, we can see that there is a long-term trend where hold periods have risen for the past 14 years in all Australian property markets.

In numerous property markets, a noteworthy observation has been made relating to hold periods and market activity. As hold periods approach the 10-year mark, it’s more likely that we’ll see an increase in listings of established properties.

The reason being, homeowners have often waited for this milestone before deciding to sell. When this trend is identified, it can open a window of opportunity for potential investors, signalling an impending surge in supply due to increased property listings.

Broadly speaking, while the trend of increasing hold periods has been prevalent in the past decade, it remains important to “zoom in” and analyse supply at the suburb level. Rising hold periods at a suburban level often indicate a decrease in supply, marking such markets as potentially beneficial for investment.

Generally speaking opportune property markets would have a rising trend for hold periods indicating lower supply levels. See the data dictionary page for favourable, neutral and unfavourable ranges of this important supply metric.

Remember, optimising your investment strategy isn’t always about timing the market; it’s about time IN the market. Assess these important metrics and approach your property investment goals with an informed, strategic mind, and you’ll be well on your way to long-term real estate success.