How home owners, buyers and investors can interpret lagging and leading indicators

Accurately predicting the future of the property market is fraught with challenges, with buyers, sellers, home owners and investors confronted with an array of different data points.

Grouping insights into lagging and leading indicators can be helpful for property watchers, and understanding the differences between each is key to making wise decisions.

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.

Looking to the past

Home buyers and investors tend to look more at lagging indicators to identify long term trends in areas where they are considering purchasing, says PRDnationwide chief economist Diaswati Mardiasmo. 

Annual or quarterly price growth measures historical changes in median prices and is the lagging indicator buyers examine the most.

“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,” she said.

“If you look back five, 10 or 15 years, you can see how a particular area responded to natural disasters, the global financial crisis or political movements.”

Similarly, home owners tend to use historical price performance to determine whether it’s a good time to sell.

“For someone who is selling, lagging indicators are important because you want to make sure you’ve earnt the capital growth over the time, and you don’t want to be selling prematurely,” Mardiasmo said.

• Read more: The ultimate guide to selling your home

Predicting the future

Lagging indicators examine changes that have already occurred, making measures like median price growth accurate but inherently dated.

Leading indicators can be more volatile but 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 leading indicators because they tell us something that’s going to happen down the track,” said AMP Capital chief economist Shane Oliver.

“The ultimate leading indicator of the property cycle is what interest rates are doing. Typically when rates come down, it gets easier to borrow, and that helps the broader economy but also makes it cheaper to get into the property market.”

“Eventually, that can lead to a pick-up in property prices.”

Auction clearance rates are another valuable leading indicator, with changes corresponding to shifts in the supply and demand balance. 

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.

These two indicators can also provide an insight into the number of properties that will be for sale in the future, Oliver says, because increased availability of credit and rising demand gives people more confidence, including home owners.

“Normally, lower interest rates – or an easing in monetary conditions – brings forward supply. You can see quite clearly that supply starts to pick up when you see a strong surge in clearances.”

The number of days properties spend on the market also provides a guide to demand, price growth and potential supply, Oliver says.

“Once that starts to tighten – when properties are on the market for shorter periods – it leads to higher prices. Word of mouth gets around that there’s a lot of demand around and people start to list.”

Although a greater number of properties to choose from may bring relief some to stock-starved buyers in today’s 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,” Oliver says. “So, even though you’ve seen this surge in prices and clearance rates, and those are all the things that will bring on supply, it will be a while before it actually dampens things.”

Insights from the past and predictions of what may occur in the future are both valuable to property watchers, but taking a broad view is critical, Mardiasmo says.

“For anyone who is transacting in the property market, whether they’re a buyer, investor or seller, looking at both is really important.”