You may have heard the term “property cycle” but what is it, does it exist and what does it mean for you as the buyer, seller or investor?
The property market, similar to other markets, moves in cycles and depending on who you talk too or what you read, there are 3 to 4 phases to consider which we’ll run through shortly.
So what is a property cycle?
To quote an explanation from Wikipedia, “A property cycle can be seen as a logical sequence of recurring events reflected in demographic, economic and emotional factors that affect supply and demand for property subsequently influencing the property market.”
The first recorded study of the property cycle was back in 1895 so data has been around for quite some time and more importantly, has been measured. The property cycle is fairly poignant at present, especially with many commentators claiming the Sydney & Melbourne markets are either booming or at the peak cycle and the next stage is downward.
How long does the property cycle last?
Depending on who you listen too, each cycle can last between 7-10 years and generally during one full cycle property prices will double. Keep in mind this is general rule and property cycles can be far more localised than most people recognise. As an example, take Melbourne and more so Sydney at present compared to the growth in other capital cities and also compare that with regional and mining dependent areas where a slump is taking place. It is unusual for every capital city in Australia to be in the same stage of the cycle simultaneously as each market operates independently of the others. We could even drill down further into specific areas of one city that may be in different phases of the cycle depending on what is happening in the particular area, infrastructure projects etc. may have an affect.
So lets discuss the various stages of the property cycle, they are fairly self explanatory but worth delving into to see where we are at any time and what the next likely step will be. We won’t need the crystal ball after this as we’ll all be property experts! In all seriousness, as a property buyer or investor it is important to know where the market is within the cycle to ensure you secure or sell your property at the right price or if you can either ride out a declining cycle and wait for a growth phase.
Please see the diagram below for a basic idea on how the property cycle runs and with the premises that property is an appreciating asset that continues to grow over time.
The Boom Phase
Lets start with where we are in Sydney at the moment, the Boom phase! As the term suggests, property prices increase at a rapid rate and it is generally the shortest phase of the cycle. When this cycle begins many people do not believe that it will last and think it is only a short term phase. Certain factors occur during the boom phase including:
- Rising rents.
- Rental yields fall as property prices outstrip rental rises.
- Foreclosure or mortgagee sales reduce.
- The time taken from a property being listed to sell and actually selling is reduced.
- Mortgage activity is up as people utilise new found equity to invest or consumer spend.
- Properties sell for well above asking/advertised prices.
- Accessibility to finance improves.
As the boom stage continues, more people join the market to try and take advantage of the upturn. Vendors or sellers also recognise this stage and they in turn try to push up prices to maximise their return. The market also tends to be flooded with developers, new properties and people wanting to cash in on a sale. Unfortunately what then happens is an oversupply which brings an end to the boom cycle and leads us straight into:
Slump or Correction Phase
The slump or correction phase begins when there is an oversupply of property and vacancy rates begin to rise. During this phase, property prices stop growing and can also decline. The slump phase can be a lengthy period of time and people may take some time to realise that the market is actually correcting. The slump is generally the longest phase of the cycle and the bigger the proceeding boom, the longer and harder the slump phase will be. Keep in mind property prices may not actually fall during the slump phase, they may just stabilise and correct. First home buyers and up graders may struggle during this phase, especially as interest rates begin to rise. Distressed sales increase and people don’t receive the sale returns they expected.
Other factors include:
- Finance becomes harder.
- Increased rental vacancy rates.
- Property price growth stagnates or declines.
- The length of time to sell increases.
- Investor cash flow tightens.
Stabilisation Phase
Now after all that doom and gloom, we move to the stabilisation phase. During this time economic factors begin to improve as does the economic outlook of the community.
Factors include:
- Vacancy rates slowly fall.
- Rents begin to rise.
- Property values slowly increase creating investment opportunities.
- The length of time to sell property decreases.
Upturn Phase
The final phase of the cycle is the upturn phase. During this time property values start increasing, starting with the inner suburbs and those close to the beach or coast and slowly move out to the inner ring. By the middle of the upturn phase property is generally affordable and property investment returns are favourable. This attractive market results in interest from investors and first home buyers and pushes the market towards the next boom phase.
Please keep in mind, the property cycle will always follow a pattern and therefore a boom cannot proceed another boom phase without first experiencing a slump and then a recovery etc.
As buyers or sellers, I am sure we are always trying to pick the exact time in the cycle that suits our particular requirements. However keep in mind, as a cycle, you as a property owner will most likely go through all stages of a cycle so therefore more importanty than picking the right time in the cycle to buy or sell, the quality of the property purchased should be paramount.
Also keep in mind that the time of trying to ride out a phase of the cycle may ultimately cost you much more than trying to buy at the lowest point possible or conversely sell at the high point. Only you can decide when the right time is to buy or sell depending on your own individual circumstances, so make sure it is the right property, not necessarily the right stage of the cycle.