Property Market Cycles 101
“I heard we’re in the middle of a big property boom. Do you think now is the right time to buy my investment property, Kitty?” I received questions like this a lot last year.
“I heard prices are going to fall a whole lot. Do you think now is the right time to buy my investment property, Kitty?” I receive questions like this a lot this year. Folks, keep those questions coming!
The thing is, there is no ‘right’ time to buy a property as the market is always fluctuating due to a number of factors that we’ll explore here. There are however several precautions you can take to ensure you don’t buy a property at the ‘wrong’ time – and one is to speak to industry professionals such as myself before jumping in the deep end.
The other is to understand ‘property market cycles’ so you can make a more sound decision when it comes time to buy your next home or investment property.
What is a property market cycle?
A property market cycle is the movement of property prices over a period of time, whereby it enters into 4 distinct stages and is generally affected by a variety of socio-economic factors.
What are the 4 stages of the cycle?
Commonly known as boom, slump, stabilisation and upturn phases, each stage of the property market cycle plays a huge part in determining the cost of housing at any given time.
The boom phase generally starts off slow, and will often see a huge influx of investors and first-time buyers pouring in to take advantage of rising property prices. Builders, developers and existing homeowners often want to take advantage during this time, too, which can lead to excess supply –eventually bringing the ‘boom’ to an end.
Often the longest phase in the cycle, the oversupply of available homes on the market leads to a drop in property prices during the slump phase now that supply and demand are no longer aligned.
A range of economic factors work to bring the market back into balance during the stabilisation phase; these include government policies, inflation, as well as the amount of money being printed during that time.
This is a critical cycle as typical consumers tend to place their trust in the property market again, ready to buy or invest in something new. Historically, this is also a time where interest rates decline, rents increase, and the excess properties constructed during the slump prepare the market for another price hike.
During the upturn phase, you will notice fewer rental property vacancies and higher rent prices as well as increased property values. Lasting three or four years on average, it is often best for buyers to buy now as interest rates are usually lowest during the upturn phase.
What triggers the property market cycle?
A number of common factors can kick the property market cycles into gear; these include:
- Credit availability
- Credit policies
- Economic outlook
- Inflation rate
- Infrastructure projects
- Interest rates
- Population growth;
- Rate of property price growth
- Unemployment rates
- Vacancy rates in investment properties
What is the duration of a property market cycle?
In Australia, our average property cycle lasts approximately seven years. We know this because our property prices have typically peaked like clockwork since 1981 (peaking in 1981, 1987, 1994, 2003, 2010, and 2017 to be exact)!
The above data do not take into account the unprecedented boom of 2021 that was caused by unique factors outside of the typical property market cycle (e.g. the occurrence of a global pandemic!) Let’s call that boom an outlier caused by extremely unique global conditions.
At an international level, the average real estate cycle spans roughly twenty years. But remember, as last year taught us, the property market can be unpredictable! So, we can only use these time spans as an estimate.
What is the best time to invest in the property market?
As I said, there is no absolute ‘right’ time to buy during the cycle. What works best financially for one person may not be a viable option for another.
For some investors, the upturn phase achieves the best results for what they’re after. For others, the boom phase is the perfect time in the cycle to enter the market. It all really depends on your goals and what opportunities are available to you.
My advice for now is to start by understanding the property market cycle and finding out where it’s at when you think you’re in a good position to buy. Of course, if you’re still unsure, give us a call on (02) 8916 6172 or send us an email at firstname.lastname@example.org and we’ll happily guide you through the steps!