- What determines boom and bust property cycles?
- What do you need to look for when investing in property?
- Is now a good time to buy or are we in a bubble?
Let's face it, no-one has a crystal ball but if history teaches us anything, it is this; there are 4 clear phases or cycles within the property industry that you should be aware of, not only when purchasing your property but when times also hit a low point.
Let’s remember, if you want to create real wealth, longevity is the key. You need to have a long-term approach with clear goals, direction and a commitment to your investment strategy. Stay on the path and do not veer off, regardless of any “FEAR” that might creep into your thoughts.
It is often thought that property prices in Australia always go up and double every 10 years, however this is not the case. Like all investments, prices fluctuate to reflect market conditions. Over the long run, as always stressed by PEB Group, price growth tends to trend at sustainable levels and any short-term fluctuations are eventually absorbed and prices find equilibrium.
These ‘short-term’ fluctuations are driven by 4 phases:
- Phase 1 - Recovery or opportunity phase
- Phase 2 - Expansion or growth phase
- Phase 3 - Hyper-supply or peak phase
- Phase 4 - Recession or correction phase
Phase 1 – Recovery or opportunity
“Best time to buy. Beginning of cycle”
This phase is at the bottom of the cycle and “Recovering” from the recession phase where the over supply is slowly being absorbed by the increasing demand. Likely indicators of this phase can be:
- Rental vacancy rates are likely at their high point
- There is high unemployment
- Decreased consumption but it’s starting to increase
- Land and house values are at their lowest point
This phase is the best time to buy, however with a lot of uncertainty about economic activity and job security, fear tends to get in the way of many people’s decision to act. Those that can put these fears aside and NOT follow the “herd” can do very well when buying in this phase.
Phase 2 – Expansion or growth
“Values increase, Investors become confident”
Investors in this phase become more confident as this is where you start seeing values rise and businesses once again adding employees to their rosters. A notable characteristic of the phase is that you start seeing the increase in “off the plan” sales dominate the market. Likely indicators:
- Businesses start employing again
- Supply pipeline is low, coming off the backend of recessions and recovery
- Demand starts to overtake the supply pipelines
- Developers start to invest and develop again; thus make an attempt to increase supply (but with construction there are huge lags)
- Speculators may start to enter the market paying more for property
- Increase in population growth and migration as people follow employment opportunities
- Increasing demand for dwellings both to purchase and to rent
- Declining rental vacancy rates
Phase 3 – Hyper-supply or peak
“Inexperienced Investors arrive; the Herd mentality”
Let’s welcome the inexperienced and herd following investors into the market…welcome to the BOOM times! People are paying more for their properties now, based on the belief that prices and rents will continue to rise; thus justifying their speculation. Psychology here plays a huge role, greed and the ‘missing out’ factor drives these booms. Uneducated investors see prices increasing and worry that they may “MISS OUT”.
This is the top of the market where you find the market is sitting at the point of demand and supply equilibrium. It’s a very small window and once supply starts to outstrip demand, house prices will soon begin to fall again. Likely indicators:
- Job security is high
- People are paying more for their properties now based on the belief that prices and rents will continue to rise and thus justify their speculation.
- New construction increases faster than demand
- Rental vacancy rates begin to increase
- Banks are getting nervous and they may start slowing down lending on real estate
- Property prices start to take a negative trend
Phase 4 – Recession or correction
“Banks tighten up. Investors have over extended”
People are and have over extended themselves and you will start to see banks tighten up on their credit. Likely indicators:
- High number of listings and stock in the market
- Slow/low number of sales
- Average days for sale in market is high
- With more properties comes more competition, forcing desperate sellers to reduce their asking prices (house prices drop)
- Rising Unemployment
- slowing population growth
- Rental vacancy rates continue to rise
- Improving yields and affordability
- Completions coming through and construction slows down
And the cycle starts again!
Property cycles have 2 factors to them; the above-mentioned factors that can be described as the physical, largely played out by supply and demand. There is also a financial cycle, i.e. the way money flows in and out of the market that affects prices.
Should the banks or their regulator APRA, better control money and tighten lending policies i.e. put in tighter measures for investors to borrow for investment properties? Would it help control these boom or bust roller coaster events in the market? Unsure as it is very complicated, but it’s well worth the discussion at another time.
So, what market are we in today? Is Perth sitting in phase 4, and if so, how far down the pipeline is it before it makes its way towards phase 1? Or are we at the beginning of phase 1?
Now that we have a small understanding of the property phases and perhaps why we have price fluctuations, the big question we need to ask is are we in a BUBBLE! Are Australian house prices and in particular property prices in Perth over inflated and will that bubble pop.
We explore this further in our next blog.
Today's climate is difficult but with the right structures and a long term plan, you can get through it.
One small but very helpful tip is to make sure you've submitted a Tax Variation to the ATO. If you're not sure what this is:
If you're thinking we're in Phase 1 and want to get in whilst the time is right, then give us a call to arrange your free consult. We help you set your goals, find a property that will help you reach them, arrange and set up your finances and manage your property once it's ready to be rented.
*This article is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser.
PEB Group is a complete financial planning advisory service for Perth families. Offices are located in Inglewood and Willetton, Perth, Western Australia and offer service in - Financial Planning · Finance Broking · Property Management · Property Sales · Property Investment · Development
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