A simple explanation of the Australian property cycle
When is the best time to buy property? When is the best time to sell? Can you make sure you’re buying at the right time, or the best time? Does timing even matter? If you’re looking to buy property, these are just some of the questions you may be asking yourself.
According to Nila Sweeney Managing Editor of Your Property Investment, timing is crucial, but it’s best to always consider buying property as a long-term investment,
“Whether you’re an investor or homebuyer, time in the market is more important than timing the market. Of course, if you’re able to time the market correctly, you could make a lot of money within a short period of time. You can also avoid overpaying in a hot or booming market. Bear in mind that property is a long-term play. As long as you hold it over the long term, you’d make money from it as long as you’re not forced to sell,” she says.
If you’re researching when to buy property, you may have heard of the property cycle – so what is it and how could it affect you?
Property cycles in Australia fluctuate across a seven to ten year period. By keeping track of phases in the property cycle, you may be able to capitalize on swings in the market. Understanding the property cycle should help inform your property purchasing decisions, but there’s never a ‘sure thing’ when it comes to property investment.
Understanding the Property Cycle
The property cycle in Australia consists of four main phases:
- Opportunity Phase
The opportunity phase is just what it sounds like; it’s a good time to buy because it’s at the beginning of an upward swing in the property market. This is also when, if you already own property in an area in the opportunity phase, you should hold on to it – the opportunity phase isn’t the best time to sell. But this phase is often the most difficult to ‘spot’ before we move into the next phase.
- Growth Phase
The growth phase sees values rise as property investors see the potential in an area; property owners who sell at this time will likely make more money than if they sold during the opportunity phase but less than they would if they held on until the peak phase. Since determining the peak is difficult, savvy sellers may want to sell while the selling is good, during the growth phase.
- Peak Phase
The peak phase is when things in the cycle feel the most frenetic. Investors flood the market trying to capitalise on the increasing values and sometimes, this pushes prices even higher, as more people battle to secure fewer properties. Be very cautious during the peak period, as there’s the potential to get caught up in the buying frenzy and to pay too much for a property that won’t hold that value during the fourth phase.
- Correction Phase
The correction phase is one property owners sometimes fear because values may drop, and if they purchased at the peak, their property could be valued at less than what they paid for it. Prices may not actually fall during this phase, they may just stabilize and exhibit little or no capital growth. Banks often tighten their lending during this phase as well, making finance more difficult to obtain.
What influences the property cycle?
Several key factors influence the property cycle across Australia; but that these factors don’t necessarily have a universal impact. While the overall economic outlook of Australia has a general influence on property cycles, each region is different and the property cycle often crops up in ‘micro-cycles’ in suburbs and towns, regardless of what’s happening in neighbouring areas. Unemployment, population growth, exchange rates and interest rates all have an impact on Australian property cycles.
Low unemployment figures make an area more attractive to both individuals/families and investors. Low unemployment rates mean there are jobs available in a particular area, providing a sense of security for individuals/families and strong rental potential to investors. Conversely, areas with high unemployment rates may indicate a risky investment, and are less likely to indicate an opportunity for value growth.
- Population growth
More people means more demand for housing but building property is a (relatively) slow process. If population increases outstrip the housing supply, the old economic principle of supply and demand kicks in and values may rise as demand increases. Do your research – state and federal governments forecast population growth and associated development years in advance and provide this information to the public.
- Exchange rates
A lower Australian dollar (against foreign currencies like the US dollar), make properties cheaper for foreign investors and resident expats to purchase, making it a strong investment opportunity for overseas buyers.
- Interest rates
Low interest rates also drive both domestic and foreign consumers into the market.
When should you buy?
For many would-be buyers and property investors, timing is ‘everything’. But is timing really that important? Yes. And no, according to Metropole Property Strategists’ Michael Yardley,
“While many home buyers and investors would like to time their purchases at the right time of property cycle, this is very difficult to do,” Yardley says. “We are often taught this is a good idea to buy counter-cyclically, hearing people like Warren Buffett giving advice to “be greedy when others are fearful and to be fearful when others are greedy.”
But identifying the right time is often difficult, if not impossible. “Even experts have difficulty picking the phases of the property cycle until after the fact,” he says. “Of course it makes sense if you know where things are heading and buy before the crowd does, but that’s not easy and not always the case.”
Although keeping an eye on the market phases is a good idea, Sweeney points out that residential buyers should focus more on affordability, regardless of timing in the market.
“If you’re buying a home to live in as a residence, it’s all about affordability, not timing the market. If you can afford to buy and support your mortgage repayments, then anytime is a good time to buy. Of course, when you buy at the bottom of the cycle, you’d pay less than when it’s booming.”
Choosing when to buy a residential property will have a lot to do with your personal circumstances, the type of home you’re purchasing and whether you intend to sell that property in the future or turn it into an investment property.
“Timing definitely matters. Of course you don’t want to buy a property at the peak of the property boom, just to wait three or four years before its value starts to rise again,” Yardley notes.
Sweeney agrees saying, “Personally, I won’t buy in a hot market as I don’t want to compete with other buyers. I much rather wait or look elsewhere,” she says.
However, Yardley points out that, in general, residential buyers do not need to be as concerned about timing their property purchase,
“In general home-buyers do not have to be as particular about timing the property cycle as their needs a long-term. Many are buying a new home and selling the existing home in the same stage of the cycle – so timing isn’t really important to them.”
For more on timing in the property market, listen to this podcast, where Yardley explains why the concept of ‘good timing’ is the most misunderstood aspect of the property market. Getting your timing right also depends on regional factors, and in many cases sub-regional (e.g. suburb by suburb trends.)
Regional influences play a big role in property cycles – just because it’s booming in Sydney doesn’t mean property in Perth is feeling as buoyant. Here are some common regional influences for major urban areas across the country:
Everyone loves Sydney. Well, perhaps not everyone. But Sydney is an extremely popular city for both domestic and foreign investment. Foreign migration to Sydney is a major driver of property cycles. Geography also places a key role; the Great Dividing Ranges to the west and the Pacific Ocean to east limit Sydney’s urban sprawl.
Development rates are stable in Melbourne and so there’s an ongoing flow of supply, which keeps the market from excessive fluctuations.
Brisbane’s got a lot going for it in terms of property market influences. Though its cycles are, to some extent, tied to Queensland’s resources and tourism sectors, Brisbane’s cycles are largely driven by domestic migration – those sea changers and sunseekers flocking north in search of a more balanced life in warmer climes.
Property prices in Hobart are tied to Tasmania’s general economic outlook, which, unfortunately, hasn’t been that stellar over the last few years, which may mean that Hobart is set to enter a growth phase soon.
Darwin’s property cycles are largely reliant on major oil & gas investment and the development of military infrastructure. It’s also a heavily influenced by its links with Asia, so recent free trade agreements may help strengthen economic and tourism prospects in the region.
The mining and resources sector, as well as tourism, are key influencers in Adelaide’s economic market and these influences have a flow-on effect to property. Population growth (and therefore housing development) in Adelaide is also stable, which means sudden shifts in population and demand have significant impacts on the market.
Like Darwin, Perth’s property cycles are linked to commodity prices in the resources sector. An upswing in production or development in mining and oil & gas fuels rapid population growth in Western Australia, pushing up demand and values.
Where are we in the property market cycle now?
Property cycle phases are much easier to identify retrospectively; given that property across Australia enters and exits various cycles in the property cycle at different times, where you live or are looking to buy will largely determine what phase of the property cycle you are in. Yardley stresses that all cycles are local, which is sometimes confusing, as media tends to report on ‘national trends’:
“One of the things that confuses many property purchases is the media’s reporting of property cycles because there is more than one property market and each is at their own stage of its property cycle. Within each state there are multiple markets, some geographically defined and others by price points. And these are all at different stages of their cycle.”
Towards the end of 2014, Melbourne and Sydney were at the mature stage of their property cycles, while Perth & Darwin reached their peaks a number of years ago and are now into the slump stage of their cycles with prices falling.
Both Yardley and Sweeney think that Sydney and Melbourne are at a mature (peak) point in their property cycle.
“Broadly speaking, Sydney’s property market has peaked and now slowing. It won’t fall but the growth will slow. The same through with Melbourne, it’s had its peak. Brisbane, Canberra and Hobart are on the rise, Adelaide has just come out of the bottom while Perth and Darwin are on the declining phase,” says Sweeney.
So what can property buyers do?
Given that property cycles often occur at a suburb-by-suburb level, thorough research into market trends in your area(s) of choice is a really good idea. Speaking to a financial planner could be a good move, so you can be more confident in making the right property investment decisions to suit your family.