I N V E S T M E N T O R

Most people are familiar with the concept that the property market moves in cycles – just like a clock. Property values rise, markets go through a correction then rise again. The whole cycle takes around 7-10 years, (although recently commentators have adjusted this to a more conservative 10-15 years) and ideally one cycle should see property prices double in value.

However there is much more to the property clock than just understanding the concept of it.

The property cycle phases

To understand the market cycle, we must first understand that there are four key phases:

  • Top of the market (12 o’clock)
  • The downturn (1 to 5 o’clock)
  • Bottom of the market (6 o’clock)
  • The upturn (7 to 11 o’clock)

Once we understand this, we can take a deeper look and begin to analyse the events during a downturn and an upturn, which we can then take as indicators to assess where each city or suburb is on our property clock today. 

Top of the market

This is the time just after a period of rapid growth where prices would have reached to the highest point of the cycle. We would have a situation where prices and construction are at an all-time high while rental yields and affordability levels are at an all-time low, due to this, buyers slow down on purchasing which shifts the market into its correction phase, the downturn.

The downturn

Many people equate a downturn to a property crash, however this is a misconception. In a market where the economic fundamentals are in growth (population and employment), a downturn is more likely to be a long, slow period where prices can remain flat.

During this phase, buyers begin to slow down while construction is playing catch up from the boom during the upturn, causing a potential short period of oversupply. However this is mostly absorbed as construction will slow when building approval numbers decline.

This period of inactivity is a time where rental yields start to slowly make its way back up while property prices remain flat until we get to the bottom of the market.

Bottom of the market

At this point in the cycle, prices would have remained flat for quite some time. The market situation would be lucrative for buyers as it would be a period of high rental returns and affordable property values. Buyers begin to enter back into the market causing property values to start climbing, causing the upturn.

The upturn

As more buyers enter the market, prices start to increase dwindling the supply of property, because of this a period of under supply may be experienced. This pushes demand for new construction and building approvals compounding the growth effect.

During this period, property values typically grow faster than rental growth causing the rental yield to decrease over time.

Eventually, affordability constraints will lead to prices peaking taking the market back to the top again, then the cycle starts again.

Not just one cycle

The graph below represents the median house price from 1995 to 2015 in Brisbane (red), Melbourne (green) and Sydney (blue). Using the concept of the property cycle, we can see that Sydney peaked between 2003 and 2004 then went through the downturn until 2009, soon after the market recovered and soared in the upturn. If we look at Brisbane during the same period, we can see the opposite.

Source: RP Data

Therefore, it is highly unusual for every Australian capital city to be in the same stage of the cycle at the same time, each city operates independently of the others. Yet even this is quite a broad statement, each suburb can also be at different stages of the property cycle depending on local infrastructure changes.

Other influencing factors

While no one has a crystal ball to predict future property values, once we understand how each phase of the cycle works, we can start to identify indicators that define each phase of the cycle, which can fundamentally help us determine where each market is on the property clock.

There are however other external factors that can also influence market conditions and price growth, for example:

  • Lending policy changes
  • Local infrastructure changes
  • Foreign investment policy changes
  • Interest rate changes
  • Vacancy rates
  • Broader economic conditions

Some of these factors can be quite localised for example one particular area may experience growth due to a new train line being constructed while the next suburb may be unaffected.

It is critically important to understand these other influencing factors and only when combined with the knowledge of the property cycle, can we then make more balanced and reliable investment decisions.

Ultimately, the right time to invest is when you can afford it. Understanding the market cycle and knowing how to apply it in the market on a state, city and suburb level will be vital on building a successful long term property portfolio, jump on our next online workshop and check out what we can do for you.

 

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