Whether you are buying, selling, or a long term investor of Australian property, understanding the Australian property cycle can help you optimise your buying and selling decisions.
The Phases of The Australian Property Cycle
Different Australian property commentators might use slightly different language, but there are essentially four main phases to a property cycle, as explained by the guys at Milk Chocolate Property Concierge. They are :
Peak Stage – Marks the top of the market:
- Prices will have increased very rapidly (as much as 20% year on year), but have reached the highest point of the cycle and can start to decline.
The Correction Stage – Prices will moderate or stay stagnate:
- People often equate a correction to a price crash, it’s typically where prices come back to normal levels after the peak stage. Sometimes a correction is simply a long, slow period where prices stagnate.
Value Stage – Prices are flat, leading many people to believe it’s a good time to buy:
- Prices will have declined and are approaching the bottom of the market or are at the bottom of the market.
The Growth Stage – Prices begin to rise, slowly at first before picking up the pace:
- The market is at the start of recovery, it’s continuing to rise or is approaching the peak stage.
An entire Australian property cycle will generally take around seven to ten years. In some instances it can happen much faster, and in other instances can take longer. In one property cycle it is not unusual to see property prices rise more than 100%.
We don’t generally consider the Australian property market in one bucket, and each State or major town or city can be at a very different point in the property cycle depending on regional or local factors. As we discuss in the next section, there are a multitude of factors impacting property prices which has resulted in the property market across Australia being at very different stages.
As we approach the end of 2017, the Perth property market can probably be categorised as being somewhere around the end of the correction stage or early part of the value stage, whilst the Sydney property market being somewhere around the peak.
What are the factors influencing the Australian Property Cycle?
A new property cycle generally forms out of a growing population. This growing population drives demand for property boosting rents and house prices. As house prices increase, property developers and investors step in and increase the supply of property until a new equilibrium is reached between supply and demand. Invariably, at some point new housing construction outstrips demand and the property market begins its correction.
Ultimately however, there are a multitude of factors affecting property prices that can impact the Australian property cycle at a national, state or local level.
- Population growth – creating an increased demand for property
- The lending criteria of the banks and their willingness to lend funds. During the course of 2017 we have witnessed a significant tightening in lending to Australian expats, as well as the banks increasing interest rates on loans to investors.
- Economic growth and the outlook for economic growth
- Government policy – for example, over the last few years we have seen the government put in place further disincentives for overseas citizens to buy Australian property.
- New building starts – are new buildings keeping pace with population growth?
- Local infrastructure projects – new motorways, airports, industry development
- Availability of property (rental vacancy rates)
- Interest rates and the ratio of loan servicing costs to personal income
- Rental yields – is property in specific areas an attractive investment based on the rental returns?
How do you know when to buy?
Unfortunately no one rings a bell when it is time to buy, and it is not possible to know exactly how long each stage of the property cycle will last for in a given area. But what we do know is that it is possible to get a feel for where each of the major cities are in relation to the Australian property cycle.
If you are interested in buying property in Australia, then buying in the early part of the growth stage can reward investors with a quick capital gain. Buying during the value stage of the Australian property cycle may provide buyers with better negotiating power and the ability to find a bargain, but will require a longer investment horizon to capture the full benefit from the next growth stage of the property cycle.
If you want to take advantage of the different stages of the Australian property market across the country, then you may want to consider using a buyers agent. We have partnered with Milk Chocolate Property Concierge to offer our readers a special offer. Milk Chocolate also have access to the latest data on the property market across the country to help identify the best areas for investment.
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