How can you tell which time is right to invest in real estate? The question of when is the “right” time to buy or sell a property is a tricky one but, studying real estate market cycles can be an effective way to anticipate the movement of property prices.
We’ve all seen the headlines: “Australian Property Prices are Booming!” In recent months, property prices have grown across Australian capital cities in spite of the Covid-19 pandemic. Whether you’re an investor or not, you’ll likely have heard the term “property market cycle”, and you may be wondering what it means. In this article, we’ll help you understand what it is, how it can affect your investment strategy and why those property prices are booming across the country.
1) Understanding the phrase “property market cycle”
A property market cycle describes the movement of house prices through various stages. Each stage of the cycle varies in length and is generally affected by a range of socio-economic factors.
2) Understanding the four stages of the property market cycle
Among investors and property experts, these stages are commonly called:
- Boom;
- Slump;
- Stabilization;
Let’s dig a little deeper.
The boom phase
Despite the name, this phase tends to start slower as investors recognise that property prices are on the rise. Though, as the name suggests, it’s over fairly quickly.
Each boom sees an inpouring of new investors entering the market at the same time as hopeful homeowners; both contributing to the demand. At this stage, builders, developers, and existing homeowners also flood the market to take advantage of the higher prices. This influx eventually leads to excess supply, bringing an end to the boom.
The slump phase
During this phase, the oversupply of properties available on the market brings about a drop in property prices. The slump phase is normally the longest in the property cycle.
The stabilization phase
The property market is not an independent organism – it relies heavily on other factors. During the stabilization phase, various economic factors play catch up, stabilizing or getting back into balance. Such factors that could affect the stabilization phase are government policies, inflation, and the amount of money being printed by the treasury.
This phase of the cycle is critical to the market as it is during the stabilization phase that everyday consumers rebuild their trust in the property market. It is also the time where, in general, interest rates decline, rents increase, and the surplus of properties built during the slump phase sets the stage for the next property price hike.
The upturn phase
This is the phase when vacancy rates in rental properties slowly decline, rent prices start to climb and property values turn upward, though much slower than during a boom.
This phase of the cycle can last three to four years and is often an affordable time for buyers to get into the market as interest rates are usually lower in the upturn than during any other phase. Smart developers use this phase as an optimal time to begin projects with scheduled completion dates that they anticipate will coincide with the next property boom.
Now that we understand the stages of the cycle, let’s explore some of the factors that can affect the process and what it can mean for you.
3) Understanding the causes of the property market cycle
Some of the most common factors that can affect the property market cycle include:
- Interest rates;
- Population growth;
- Economic outlook;
- Credit availability;
- Credit policies;
- Vacancy rates in investment properties;
- Inflation rate;
- Infrastructure projects;
- Unemployment rates; and
- Rate of property price growth.
Low unemployment rates can also affect the cycle as they can make certain areas more attractive to individuals, families, and investors. Similarly, areas with high unemployment rates are unappealing to individuals, families, and investors as there will be less potential for value growth.
Population growth is another element that can influence the property market cycle. New developments, such as schools and shopping centers, can drive population growth and, therefore, the demand for housing.
Finally, we can also conclude that the exchange rate will have an impact on the property market cycle. If the Australian dollar is low against currencies such as the US dollar, properties are likely to be affordable and more appealing to foreign investors, motivating overseas buyers to invest in property, which will begin driving up house prices.
4) Understanding the length of a real estate market cycle
The average real estate cycle across the globe spans an average of almost 20 years. However, real estate cycles are unpredictable, and the time span can vary dramatically.
The average property cycle lasts about half that time in Australia, with property prices peaking about once every seven years. Historically, our property prices peaked in 1981, 1987, 1994, 2003, 2010, and 2017.
But don’t forget, the length of any property market cycle is affected by a combination of factors, so you should never rely on an algorithm to determine when to enter the property market. Often, the market is influenced by a swift change in government policies that nobody could predict, so it pays to watch the market and monitor fluctuating house prices and interest rates.
5) Understanding the best time to invest in the property market
Some investors have the best success during the upturn phase. For others, the boom phase is the right time to enter the market, depending on their goals and opportunities. So, at what phase should you enter the market?
Of course, there is no one-size-fits-all answer to that question. Unfortunately, there is no infallible way to pick the right time to invest in the market.
But if you take the time to understand where the property market is now, it can help you decide whether or not to buy or sell. As long as you have done your research and due diligence, there is always the opportunity for profit, no matter what stage the property market is in and what stage of your investment journey you are at.
If you’re in the process of buying an investment property, always seek the assistance of a reliable property conveyancer. Jim’s Property Conveyancing has offices in Melbourne and Brisbane and can provide you with comprehensive advice and assistance moving through your property transaction. Please get in touch with our friendly and experienced staff on 13 15 46.
