Want to time the market? The Property Cycle and where we’re at now

The property cycle is a term that industry commentators use to refer to the changes in Australian dwelling prices through the stages of value, growth, peak and correction. While the names of these stages may differ depending on whom you talk to, the most disputed aspect of this ideology relates to just how many years it takes to cycle through the whole process. It’s true that this fluctuates with each capital city, however the general consensus is that it follows a 7 to 10 year time frame. But why is it necessary to understand the Australian property cycle, what factors impact it, and where are we at now?

Understanding The Property Cycle

It doesn’t matter if you’ve just been handed the keys to your first property or are already boasting a considerable investment portfolio, understanding the property cycle is critical when trying to avoid overpaying and turning a healthy profit. To get a better grasp on just how you can use the different stages of the Australian property cycle to your advantage, let’s break down each phase individually.

The 4 Phases Of the Property Cycle

1. The Value Stage: The value stage would be the bottom of the trough if we looked at this on a graph. The rental market is stagnant, construction is slow, and prices feel flat. The value stage is difficult to spot as it may feel like a recession. This stage is the best time to buy because you have a chance to secure a property before prices start to rise.

2. The Growth Stage: As consumer confidence rises, property prices will begin to surge. Demand will start to outstrip supply, which further pushes prices skyward and hastens purchasing momentum. If you sell during this phase you’ll get more than if you sold during the recovery stage but less if you hold out till the peak.

3. The Peak Stage: This is where the property market is at its most frenzied. The equilibrium between demand and supply has tipped over due to the competition for affordable properties and the inability of construction to keep up. No matter your motivation for buying, it’s important that you try and be objective about the property you intend to purchase so you don’t end up overpaying.

4. The Correction Stage: Also know as the, “Oh no it’s going to crash” phase of the Australian property cycle. The correction stage is where you’ll see property prices begin to slow or stabilise, vacancy rates increase and return on investments decrease. Banks will most likely tighten their lending and the market will eventually make a full circle back to the value stage.

Factors Affecting The Property Cycle

Far from being as simple as the relationship between supply and demand, there are many factors that impact each phase of the property cycle. These include:

• Outlying housing developments
• The banks willingness to lend
• Inner city developments
• New tax legislation
• The international economic outlook
• Vacancy rates
• Population growth
• Interest rates
• Overseas purchasing incentives
• Unemployment
• Changes to negative/positive gearing

It’s also important to note that the Australian property cycle is highly localised and differs from city to city. Sydney and Melbourne for example recently experienced a pricing boom whilst Perth and Darwin are going through the correction phase.

Where Are We At Now?

Where you sit in the property cycle also on where you’re located. Rarely do multiple cities positions on the property pendulum co-align, so here’s where our capitals currently are on the property cycle at the start of 2017.

Sydney

Sydney has boomed over the last four years with prices growing by 67%5, however another interest rate cut seems unlikely while new developments and DA approvals have increased. It’s inevitable it will enter the correction stage, but when is anyone’s guess. For now, Sydney is still riding the peak.

Melbourne And Brisbane

Melbourne is another capital city that’s experienced exponential growth due in part to its population explosion, with prices up 95% over the last 10 years. It has been tipped to slow down later in the year as stated by a recent report from BIS Shrapnel6 that forecasts an oversupply of dwellings for 2017. This is not unlike Brisbane, where there’s also due to be an excess of livable properties in 2017, which will negatively impact price growth. Both Melbourne and Brisbane are also on the cusp of slumping into the correction stage, but don’t expect to see big drops till late in the year.

Perth And Darwin

Perth and Darwin are the two underperformers for 2016, with prices hitting a 3-year low. Apartment prices in Darwin are tipped to fall even further in 2017 due to rising unemployment rates, while Perth’s performance is dependent on the local economy gaining traction. Both cities are currently at the end of the correction, start of the value stage of the property cycle7.

Canberra And Hobart

Hobart has enjoyed relative success in 2016 with wealthy property owners in Sydney and Melbourne cashing out in exchange for a change of scenery. It’s worth mentioning that Canberra has also been the quiet achiever during the latter part of 2016, with strong employment and a small bump in prices due to spillover from Sydney generating solid headway. Both cities are going through the growth stage with slight increases in price predicted for 2017/8.

Adelaide

Both the sale and rental markets in Adelaide are stagnant at the moment due to a lack of demand and high unemployment. While it’s not underperforming like Perth or Darwin, Adelaide will more than likely to go backwards before it goes forwards.

Resources:
1.Shane Oliver, 16th October 2015, “What is the seven year property cycle”, (https://www.amp.com.au/news/2015/october/what-is-the-seven-year-property-cycle)
2. Paul Glossop, 28th July 2016, “What’s in store for the property market for the 2016/2017 financial year?”, (http://www.smartpropertyinvestment.com.au/opinion/15476-what-s-in-store-for-the-property-market-for-the-2016-2017-financial-year)
3. Adam Zuchetti, “Understanding property cycle”, (http://www.domain.com.au/advice/understanding-property-cycle/)
4. Shiju Thomas, 22nd June 2016, “What sort of cycle does the Australian property market experience”, (http://www.cohenhandler.com.au/what-sort-of-cycle-does-the-australian-property-market-experience/)
5. Julia Corderoy, 26th December 2016, “Gold Coast set to boom but still no end in sight for Sydney”, (http://www.news.com.au/finance/real-estate/buying/property-2107-gold-coast-set-to-boom-but-still-no-end-in-sight-for-sydney/news-story/0d10fe1f6ec94ddc1e1698eee52dc368)
6. BIS Shrapnel Report, June 2016 (https://www.bis.com.au/reports/res_prop_prospects_r.html)
7. Dr. Andrew Wilson, 22nd December 2016, “Weaker year ahead for housing”, (http://www.domain.com.au/news/weaker-year-ahead-for-housing-markets/)
8. Su-Lin Tan, 27th December 2016, “2017 predictions on how Australian house prices will perform”,
(http://www.afr.com/real-estate/2017-predictions-on-how-australian-house-prices-will-perform-20161212-gt92xr)
9. Su-Lin Tan, 6th September 2016, “Canberra housing market the surprise winner after Sydney and Melbourne”, (http://www.afr.com/real-estate/canberra-housing-market-the-surprise-winner-after-sydney-and-melbourne-20160901-gr6sb3)

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