Understanding the property cycle when buying
The Property Cycle
In essence, the property market moves in cycles, thus comes the term property cycle. Property values may rise due to strong market growth, remain steady or even decline during certain phases of a property cycle. Thus, as an investor it is important to know where the market is within the cycle to ensure you secure your property at the right price.
As is depicted in the above graph, at different stages of the cycle, property values may increase, remain steady or decrease, however ultimately, the value of property increases over time.
Property Cycle Phases
At different stages of the property cycle, property values will exceed the long term trend (i.e. in boom times) and at other stages will fall short of the long term trend (i.e. property slumps). This is because the property cycle passes through four phases:
The Boom Phase
The boom phase tends to be the shortest in the cycle, during which property prices increase at a rapid rate. This phase generally begins slowly as investors recognise that property returns such as rental payments and property prices are increasing.
As a result of the boom, properties often sell for more than their asking price, as buyers continue to compete with each other and vendors continue to push up asking prices.
As the boom continues, many try to get on board to make the most of the current stage of the cycle; new investors join the market and builders, developers and existing home owners flood the market with properties. This leads to excess supply, which eventually brings the boom phase to an end and creates the consequent phase.
The Slump Phase
The slump phase occurs as a result of an oversupply of property due to the activity of builders / developers and sellers in the boom phase. With more investment properties on the market, vacancy rates increase and rental returns begin to decrease.
During the slump phase, property prices stop growing and in some cases, may even decline. During this stage, many new home buyers also find themselves in trouble as they struggle with repayments. This is because many buyers over commit themselves in the boom phase, by purchasing properties they could not afford and interest rate rises make it difficult for repayments to be made. Therefore, the only way to relieve this financial stress is to sell – in most cases at depressed prices.
The Stabilisation Phase
The property market does not usually jump from a negative period to the next upturn. Generally, a short phase exists in which various economic factors catch up with each other and stabilisation in the market occurs.
The Upturn Phase
The upturn phase sees vacancy rates slowly fall, rents start to rise and property values start to increase creating investment opportunities.
Property values generally start increasing in the inner suburbs, or those close to the beach first and then move out to the middle ring of suburbs and eventually to the outer suburbs.
By the middle of the upturn phase, property is generally affordable and returns from property investment are favourable. Property values will generally slowly increase and peak in the boom phase of the cycle. The attractive market results in interest from investors and first home buyers, and pushes the market towards the next boom phase; therefore starting the cycle again.