Understanding the property cycle

February 16, 2016
Melinda Halloran

Unsure whether now is the right time to purchase a home or investment property? Understanding the property cycle can help you come out on top.

The property cycle in Australia has traditionally lasted between seven and 10 years. During this time, prices rise, stagnate and fall, before starting to rise again.

The cycle depends on a number of factors, including:

  • Inflation
  • Government policy
  • Credit availability
  • Interest rates
  • Exchange rates
  • Population growth
  • Infrastructure

In order for the cycle to keep moving, a number of these forces need to be at play. For example, as the population grows, there is an increased need for real estate and this leads to higher rent and demand for new housing. Eventually, these demands drive an increase in property values. But because market conditions are always changing, prices very rarely continue to increase without some correction.

The property cycle can be broken down into three recurring phases.

1. The boom

The boom phase, as the name suggests, is when property prices increase at a rapid rate, which is what we are seeing in Sydney at the moment.

During this phase we often see:

  • Rents rise
  • Rental yields fall
  • Shorter selling times
  • Increased mortgage activity
  • Properties selling for above asking prices
  • Greater accessibility to finance

Buyers' tip: While it's tempting to buy when prices are rising – out of fear they'll continue to do so and housing will become even more unaffordable – it's best to hold off and wait for the market to slow down.

2. The slump

The slump, or 'correction' phase, inevitably follows a boom when there is an oversupply of property. It is usually the longest phase of the cycle and when a market is in this phase, it is commonly referred to as the ‘buyers’ market’.

During this phase we often see:

  • Prices fall or flatline
  • Rental vacancies increase
  • Longer selling times
  • Lenders tightening credit
  • Investors experience lower cash flow

Buyers' tip: Don’t be fooled by the term ‘slump’ – this phase presents good opportunities for buyers and often simply means a long period where prices stagnate.

3. Recovery

As the economy improves, the market enters the recovery phase and conditions for buyers, sellers and investors begin to look up. This phase is often broken down into two parts: stabilisation and upturn. A market in the recovery phase is more commonly known as a ‘seller's’ market’.

During this phase we often see:

  • Increased demand
  • Higher prices
  • Finance becomes available
  • More property development

Buyers' tip: This stage of the cycle is a great time to consider purchasing properties you intend to hold onto for a long period of time.

Location, location

When it comes to the property cycle in Australia, it's important to note that peaks and lulls may differ from city to city, or even suburb to suburb. This is where factors like current infrastructure projects and population growth come in. For example, the Sydney market is heavily influenced by overseas migration while the Brisbane market has been slower in recent years due to the state’s sluggish economy.  

Where are we now?

The focus tends to fall on Sydney and Melbourne, where prices continue to climb rapidly and most of the country’s growth occurs. Record low interest rates have increased demand for property, particularly from overseas investors.

In Brisbane, the market is growing at a much steadier rate and investors are interested. Experts predict at least 18 months of solid growth is ahead and there are concerns of apartment saturation in the inner suburbs.

When should you buy?

While the right time to buy will differ from person to person, having an understanding of how the cycle works should make the process less daunting.

Understanding the property cycle, however, is only part of a much bigger picture. Interest rates, whether you can access finance and other personal and financial factors should also be taken into account. The right property can come along at any time, regardless of the stage of the property cycle, so always maintain an open mind.

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