Can you predict property cycles?
To assess this let's break down the fundamentals.
The Fundamentals
Within Australia, residential property moves in cycles with each state having a different cycle that moves at a varied rate.
A property cycle can be identified by 5 different phases:
Boom (Caution)
Bust (Danger)
Correction
Opportunity
Value
These different phases will inevitably follow each other every time.
This sequence of events can be predicted and identified by observing economic, emotional, demographic, supply, and demand factors.
Boom Phase (Caution)
Let’s start with the boom phase.
How do we know the market is in that phase?
We will see that both property pricing and rents will start to rise, with the time they are available on the market diminishes significantly. As the prices start to rise the yields will start to fall.
Generally during these times, borrowing money is easier than normal as new lending products hit the market.
It is not advisable to purchase during the boom phase as inviting as the media reports may be…you would have missed the boat.
Bust Phase (Danger)
The bust phase will always follow the boom phase.
This phase is generally the longest of all the phases with the dictation of time always reliant on the boom phase. The bigger and longer the boom phase, the bigger and longer the bust phase.
Depending on the market, this doesn’t always mean a drastic drop in pricing, just a prolonged time of little or no growth, and in some cases a slight decline.
By this time developers have flooded the market with an oversupply of stock.
Some of the common themes for media outlets during this phase include:
Affordability problems
"Doom and gloom"
Overpriced market
Vacancies for renters on the rise
Property taking longer to sell
Finance is becoming difficult to obtain
Correction Phase
After the bust phase is the correction phase, which is a short phase.
Typical occurrences during this phase include:
Values start to become more affordable
Oversupply of property starts to get absorbed
Property prices start to show small increases
Consumer confidence starts to rise
Property remains on the market for shorter periods
Investors start to return to the market.
Opportunity Phase
We now enter the opportunity stage when all the moons have now aligned to purchase a property.
Consumers are still a little tentative but the savvy investors know now is the time to purchase as all the macro and micro fundamentals are in place.
As this phase comes to a close quickly, the masses recognise that the market is now in value and mass purchasing starts again.
Value Phase
Swiftly after the opportunity phase, the market enters the value phase.
Typical occurrences during this phase include:
Prices are back on the rise
New property is completing
Media are spruiking hotspots
Consumer confidence is up
Lending becomes even easier
As the value phase comes to an end, the boom stage begins.
Key Takeaways
Working with experts who read each market around Australia, day in and day out is a sure way to minimise risks and know when to invest and where.
To stay up-to-date with everything property investment make sure you join our Property Market Pulse Newsletter here.
Jarryd Gauci – Property Investment Consultant
P: (02) 9939 3249
Disclaimer: When considering purchasing a property, it's always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your individual circumstance.