Traditionally, property should almost always be considered a long term investment. Buying property involves considerable upfront costs, as well as substantial ongoing costs, and therefore the value of a property needs time to grow into worthwhile investment. But what exactly happens over this term?
Property in Australia is historically considered a lucrative investment. It is often reported that property prices are rising in Australia and has been for many decades now. However, this growth isn’t as straightforward as it may immediately appear.
The value of property in Australia tends to rise and fall in waves. This phenomenon is known as the ‘property cycle’ and is well documented. For investors looking to purchase property in Australia, understanding the property cycle will help inform when, where and what to buy (and sell).
Let’s take a look at exactly what the property cycle is and how it can affect you.
The property cycle usually occurs over a 7-10 year period. Prices rise, fall then stabilise in phases like clockwork and have been doing so for many decades now. The four phases are:
• Stable Opportunity Stage
The opportunity phase is where prices are stable, leading many people to believe it’s a good time to invest. Those that understand the property cycle will also identify that this is the start of an upswing in the property market that will see prices rise. Because of this, it is widely deemed a bad time to sell.
• Growth Phase
The growth phase sees property values begin to increase slowly as vacancy rates fall and rent prices start to rise as investors see the potential in an area. This phase sees opportunities appear more clearly, but not as clearly as they will in the peak phase.
Interest rates are usually low and it tends to be easier to get finance in the early stages of the growth phase. Value will usually start to grow in inner city suburbs and those near the beach. A ripple effect will then see growth expand to middle suburbs and finally to outer suburbs.
The middle of the growth phase is often seen as an excellent time to invest as property is still relatively affordable, yet favourable returns are conceivable as the cycle advances into the peak phase.
• Peak Phase
As more and more investors seek to capitalise on this growth stage, prices are pushed even higher. This can see a market increase of 20% or more per annum.
The peak phase is usually the shortest and can often feel quite frantic as vendors push up demand and investors flood the market, competing to make the most of this rapid growth. Eventually the peak phase fizzles out as builders, developers, developers and home-owners flood the market with properties leading to an excess in supply.
• Fall Phase
This results in what is known as the fall or slump phase. With too many investment properties on the market, vacancy rates increase, rental returns begin to decrease and prices stabilise (or even drop). This phase can be stressful for new investors who bought during the boom phase, only to struggle with repayments as investment returns decrease.
There are many factors that influence the property cycle. Many of these can be tracked and analysed which may help give an indication of where the cycle is at and when it is likely to move. Doing your research is very important when it comes to investing in property.
These are some of the key factors that influence the property cycle:
• Population growth: Supply and demand has a huge impact on the property cycle. As the population grows, outstripping housing supply, prices may rise as demand increases. This is one of they key factors that pushes growth in the stable phase. Government resources provide information on population growth developing to the public, and it can be very enlightening to include this information in your research process.
• Interest rates: Low interest rates are likely to drive investors to the market.
• Exchange rates: This is pertinent for foreign investors looking to purchase property in Australia. When the AUD is lower, property prices are comparatively cheaper for overseas buyers. This tends to drive more overseas buyers into the market.
• Unemployment rates: Low unemployment rates often indicate a surplus of jobs, making an area seem more attractive for investors. On the other hand, areas with high unemployment rates are less likely to indicate an opportunity for value growth and thus present a more risky investment.
• Local infrastructure: New projects in the works may influence growth in an area.
• Banks: The willingness of lenders to write new loans will affect the property cycle. Banks often tighten their lending during the fall phase.
It is very important to remember that the property cycle isn’t a universal phenomenon. It is very rare that the whole of Australia will be going through the same phase of the cycle at the same time. Rather, the property market is a diverse collection of micro-cycles each going through their own phases of growth and decline.
All of the factors above are different between cities and suburbs, regardless of what’s happening in neighbouring areas (although sometimes activity in neighbouring suburbs can be a great indicator of foreseeable growth).
In order to prepare to be able to weather any fluctuations in the market it is very lucrative to have a diverse portfolio of properties, that have been strategically planned around the property cycle. This is where your property strategist is an indispensable member of your team!
Understanding the property cycle and the factors that influence its momentum is crucial in discerning when is best to buy. Typically the best time to invest is when the market is stable and has been for sometime, meaning growth is likely imminent; or in the growth stage, well before everything peaks.
Your investment team will be your eyes and ears during this process, so it is important to work closely with them to determine when to take the leap.
Consider the past. History is a great place to start when evaluating when the right time to buy might be. The property cycle lasts for roughly 7-10, however each micro-cycle has its own dynamics and will act differently to other markets. Research previous cycles, how long they lasted, and any triggers that might might indicate movement.
Furthermore, be sure to research data on those influential factors mentioned above. Each one is easy enough to research online and can have a huge impact on your decision of when to buy. For example, for foreign investors, an opportune time to buy may be when the Australian dollar is low in Australia.
As a blanket rule, when interest rates are low it is a great time to buy. As the cycle moves into the next phase, rates creep up, demand increases, and prices begin to shoot up, meaning you may have missed the boat on a cheaper investment with a low interest rate.
Whether you’re looking to purchase your first property, or your fourth or tenth, we can give you the guidance you need. If you have any questions about the property cycle and the right time to invest in Australia, feel free to get in touch today, we’d be more than happy to help.