Are property cycles real and what drives them?

There’s an old adage that you make money when you buy, not when you sell.

The property market is a prime example.

With so much talk of taking the leap and taking the plunge into property, it’s no wonder so many people are enticed into the market at the worst possible time.

If timing is everything, is there such a thing as a property cycle?

The answer is yes.  History tells us one full property cycle occurs every 7 to 10 years.

The property cycle or ‘property clock’ is a useful tool for understanding and assessing market performance and how property interacts with a number of external factors.

It is a concept and framework to be used as a guide.  Property cycles do not provide all the answers as assessing this type of market is highly variable.

So many words

Here is just a sample of the many words used to describe the property market at various times:

The property market is generally smoother than most of these words sound and is probably best understood in terms of growth rates.  More often than not, what the property market is experiencing is a period of upturn or downturn, of which there can be many within a cycle.

Related Reading: 'How to boost your home loan chances'

Stages of a property cycle

As a rule-of-thumb, there are 4 key stages of a property cycle:

Opportunity

At the beginning of a cycle prices have bottomed and the market is flat.

Growth

Confidence increases, prices rise and the market starts to recover.

Peak

The market attracts a lot of attention, becomes volatile and there is a surge in demand.

Correction

Prices start to moderate, having reached affordability limits.

The factors affecting each stage lead to the next one occurring.  For example:

• A stable market leads to renewed confidence and new investment.
• This increases demand and values start to rise.
• Demand equals or exceeds supply fuelling more momentum and accelerating price rises.
• Peoples’ perception of affordability and value-for-money reaches its peak.
• We see the top of the market.
• Market corrects itself and begins downturn towards moderate values.
• Bottom of current demand is reached and market flattens.

Market triggers

Broadly, interest rate cycles and supply and demand drives property cycles. 

Interest rates affect the availability and cost of credit, fuelling demand for property.  As demand increases relative to supply, the value of property goes up.

However, assessing property cycles is a lot more nuanced with a number of external triggers impacting what happens in the property market during each stage.  Property cycles are also very localised and segmented.  For example:

• A new school may increase demand for housing in an area.
• Closure of a big employer may increase supply and reduce demand in another.

Of course, there are also the X-factors such as foreign investment.

Picking the ‘hot spot’

Over the last 50 years, property located in popular locations in Australia has doubled its value about every 7 to 10 years.  The key is this is not always the case.

People looking to buy property can start to understand why and how this happens, by simply doing some homework.

Past property cycles in different locations will provide an insight as to how the cycle works and what the key influences are – and how it interacts with other external variables.

When the perfect property becomes available at a time when you can afford it, you’ll know what to do.  Also ask a tax accountant or financial adviser about your options.

Related Reading: 'How to spot a property hotspot'

Let us show you

A simple conversation about your situation could improve your financial position and lifestyle at the same time.

At Loan Avenue we know one size doesn’t fit all.  It pays to have a conversation with a real a person who wants to hear your story and run through some property scenarios with you.

Why not incorporate a discussion about buying a new property as part of our free no obligation home loan review?

It’s just one of the many features and benefits included in a tailored home loan from Loan Avenue – affordable home loan solutions for everyday Australians like you.

Let us show you.  To make an appointment with one of our experienced and accredited finance professionals call 1300 56 26 28 today or leave a message here.