The old saying what goes up, must come down is true for the property market too. Never right down. But there will always be peaks and troughs in the property market, just like anything else in life.
So, what is a property market cycle?
The majority of commentators refer to 7-year cycles, which generally have 4 phases. At its most simplistic, cycles happen as our population grows. This results in an increased demand for real estate – both rentals (purchased by investors) and new homes for owner-occupiers. Slowly this results in values increasing – the simple economics of supply and demand.
What are the four phases
Boom. Downturn. Stabilisation. Upturn.
The boom phase is the shortest phase of the cycle. Properties can increase rapidly during this time, often more than 20% each year. During this time, a new generation of investors enter the market, hoping to be part of that upward swing. Builders are building like mad and prices are rising.
The downturn happens just after the boom as a result of oversupply from overly optimistic builders during boom time. Soon as this happens, we’ll see dropping values and rent reductions and sometimes, vacancy for long periods. During the downturn, properties can drop 10 per cent. This phase will last a number of years, followed by a deeper slump with prices falling more.
The stabilisation phase is when the market moves on. Falling interest rates and pent up demand sets the stage for the upturn. Prices won’t rise by much, but things will start to move up slowly as people re-enter the market. This phase is often missed by many investors but can actually be a great time to buy. As an example, savvy Sydney investors entered the market during the acute post-Corona lockdown period.
Finally, when we move to the upturn phase, things are looking a lot shinier – rents and values are rising. However, property is still very affordable and returns can be attractive as more buyers enter the market. Builders are starting new projects aiming to have them completed by Boom-time. At the end of this phase, prices rise considerably.
And then we start all over again.
How long do they last?
Sorry, unfortunately there’s no crystal ball and no set times. But looking back, property growth in Australia has peaked in the following years: 1981; 1987; 1994; 2003; 2010, 2017. Digging deeper into the stats, it’s clear that over the past 40 years, well-located capital city properties have seen their values double every 10 years (growing at around 7% per year on average, according to the Real Estate Institute of Australia).
This compares to Australian share market returns of in excess of 13% on average.
Investing in property is the same as investing in shares. You need to make rational unemotional decisions.
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