Demystifying Property Cycles
Investment cycles have been the topic of many a dinner table discussion. Everyone seems to be somewhat of an expert on the subject or at the very least has their own very strong point of view as to where a market is going next. The ‘Property Cycle’ is no different to that of any other class of investment but of course, it has its own uniqueness and peculiarities.
Given the situation of the Brisbane real estate market, we thought now may be a good time to explain just how the property cycle works in Australia and what the data tells us to expect.
In this post, we will answer some of the basic questions commonly asked about the property cycle and hopefully place you in a better position to make an informed purchasing decision.
WHAT IS A PROPERTY CYCLE?
A ‘property cycle’ refers to the time it takes for the market to go from a ‘trough’ (generally evidenced by an oversupply of property, little or no growth or even falling values), to a ‘peak’ (when we usually have an undersupply of property, rising prices, rising rents, and falling vacancies).
HOW DOES THE PROPERTY CYCLE WORK?
Typically a new cycle begins when an oversupply of property, created during the final stages of the previous peak, has finally been absorbed into the market. Generally, the reason for an oversupply is that prices rise during the upswing of the property cycle indicating a strong demand for property.
So more property is brought to the market and the laws of basic economics – supply and demand take over. What follows is a correction in the market which is seen as a plateau in property prices, and sometimes a decrease until demand catches up with supply.
There are several main drivers that consistently influence a property cycle. These drivers include:
Population Growth. It is of course the actual number of people who live in any area which affects the supply and demand for property. And the longevity of that population staying in the area and continuing to grow.
Employment. The availability of jobs is a major influence as people often move closer to where they can work. Without a stable income, the cost of owning or renting a property is simply not affordable for most of us. As people move to where jobs are being created, the increased demand diminishes the supply of property. This, in turn, starts to push prices up and as more buyers enter the market prices begin to rise.
WHAT DOES A TYPICAL RESIDENTIAL PROPERTY CYCLE LOOK LIKE?
In very basic terms, the normal cycle consists of very strong market conditions, often referred to as an upswing, followed by a downturn which is then followed by a recovery. The peak is the time when confidence is at its highest.
Generally, in this period, more people are employed, and the economic conditions are strong. This is when good capital growth occurs; when there is a constant demand for property and relatively low availability. As the cycle proceeds and prices rise, it invariably entices builders and developers into the market to create more properties and we start to see the preconditions for an oversupply develop.
The downturn starts when supply has overshot demand. Prices begin to soften and buyers defer purchasing. This dampening in demand adds to the available supply and prices soften further. Now the market peak starts to flatten out. As buyers continue to dwindle demand drops and prices flatten or even fall slightly. This is the ‘trough’ or low part of the cycle.
In time there will be a recovery. This occurs when the excess of the property has been absorbed by buyers who recognised an opportunity to pick the low-hanging fruit – to buy when others were holding back. Buying somewhere near the bottom of the market is attractive because there is less competition for property, a wider choice, and the opportunity to negotiate a lower price than otherwise would be the case. The inevitable return to the upswing marks the end of the old cycle and the beginning of the new cycle.
WHEN SHOULD I BUY?
Many investors try to time their purchase in the property cycle so that they sell their property during the ‘peak’ and buy during the ‘downturn’. Whilst this may be a smart strategy, unfortunately, it is extremely difficult to pinpoint the exact moment that we have hit the bottom of the cycle.
In our experience, there is an opportunity in every market, and being thoroughly informed of what is driving the market for long-term growth will position you to minimise your risks and maximise returns whether you are purchasing somewhere to live now, in the future, or as an investment.
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