A rudimentary understanding of the property cycle can give you the confidence to snap up some great deals to cleverly boost your property portfolio when others shy away.
I’ve been at many a dinner party discussing whether we’re at the top, the bottom or somewhere in between of the property cycle. General consensus seems to be that if people knew how to track it, they’d be rich. However, in reality, human nature often makes us shy away from buying when properties fall in value. We’ll ironically only dive back in when there’s a competitive frenzy pushing the prices up!
Factors affecting the property cycle
As the saying goes, “what goes up must come down”. The property cycle is affected by a number of factors such as immigration, population growth, local and global economy, unemployment, politics, social issues and so forth.
With so many things to consider, defining its timeframe is difficult. However, looking back over the last half a century, well-located properties have doubled on average approximately every seven to 10 years. But not in a straight line.
There have been stages when values increased at up to 20% per annum, and there were other periods when the market was flat or going backwards.
Here’s a closer look at each of the three phases of the property cycle.
The down or opportunity phase
As the property market hits the bottom of a cycle, prices don’t just plateau. They can go backwards, heralding the beginning of a new cycle.
If the boom was particularly long and solid, the slump phase may last a little longer. But you can be sure it won’t last forever and this is the time to jump in.
The media plays a huge role in every cycle, but nothing sells newspapers like doom and gloom! This leaves many people feeling that there is no doubt that the sky is about to fall in – even when faced with blatantly good opportunities.
Then the people who over committed at the top of the boom will start to struggle. Especially those who bought off-plan and are unable to settle, or people who simply over- extended themselves. At this stage they are often forced to sell under pressure and get whatever they can. And so prices fall.
These “fire sales” may not be pleasant to go through, but they create amazing deals for astute buyers who are willing to get out their cheque books in a downturn. Also, after much talk of falling prices, vendors who don’t have to sell hold their properties back, creating a lack of supply. This leads to buyers having to compete for what is on the market and this competition slowly pushes prices, and therefore confidence, up again.
A rise gaining momentum is triggered by many social and economic factors, but one of the most important is the Reserve Bank dropping interest rates. When the rates are low you can bet it’s a good time to buy. And this leads to the upturn phase.
The upturn phase
The property market doesn’t jump from negative to positive growth in a blink of an eye. In fact it often stabilizes without many people noticing. Mainly because the media won’t be rushing to report on it!
At the first hint of an upturn, many of the vendors who’ve been holding back take the plunge. This puts fresh properties onto the market to entice buyers.
Homeowner buyers usually lead the charge because of lifestyle needs, but professional investors quickly catch on. As word spreads of a growing confidence, more people are encouraged to sell.
With supply and demand now on the increase, prices tentatively start their exciting journey up again.
Interest rates are probably still low during the upturn phase, creating attractive and affordable investments with strong returns. Professional investors are usually back in the market, but novice investors are probably not convinced that it’s the right time to buy yet.
Traditionally, the first areas to increase are around the city ring and those offering a blue-chip lifestyle, such as beach suburbs. Next come the middle ring suburbs. Eventually most of the country will again enjoy healthy increases.
By the end of the upturn phase, property prices have usually substantially increased. And so we enter the peak of the market, or boom phase.
The boom phase
The peak of the property cycle becomes a feeding frenzy. It’s usually now that the more inexperienced or risk-adverse investors jump in. Having studied others making their money through the growth stage and having again been influenced by the media, property seminars and general hype, they’ll now grab anything, at almost any price. Desperation to get in on the action keeps pushing prices up.
Recent Australian booms were in: 1981, 1987, 1994, 2003, 2010.
As competition intensifies, many properties sell above their asking price. Driven by fear of missing out, buyers can become blindly confident that the market will continue to rise at a time when caution should be paramount. While properties may be rising by 20% per annum, it’s impossible for the market to sustain that kind of growth.
Now, developers often flood the market with new or off-plan properties to meet demand. And so the pendulum swings again to oversupply, which often triggers the end of a boom.
Buying off the plan in a boom, with the strategy of selling in a year or two for profit without having the funds to settle, is a gamble many have lost.
Again, The Reserve Bank will slow down a property boom by raising interest rates. If they do that a few times in a row it’s generally time to purchase with care because to recap: what goes up, must come down.