What is a property market cycle?

In recent months, property price growth across capital cities has reached record highs, notwithstanding the impact of the COVID-19 pandemic. And some experts are predicting that the boom won’t be over until the end of 2021.

If you’ve been following Aussies’ long-standing love affair with the real estate market or just have recently caught up with the real estate market frenzy, you might have encountered the term “property market cycle” used by commentators.

But what does it mean? And how could understanding the property market cycle help you make informed decisions about buying or selling your investment property?

What is a property market cycle?

A property market cycle describes the movement of house prices through stages. Historically, these cycles are observed to start with a period of rising values, followed by a lull period in which prices stagnate or even decline, before starting to increase again.

Each stage of the cycle varies in length and generally reflects a range of socio-economic factors and conditions which in turn influences the property market.

These stages are commonly called boom, slump, stabilisation, and upturn. Remember that the names for each stage can vary but have generally the same definition, which we’ll look into later.

Historically, property market cycles revolve around two specific factors: supply and demand for property. If the demand outweighs supply, property prices will rise. However, if the market gets a supply boost (either from developments or as more sellers come onto the market) prices will decline.

To put things in perspective, let’s see an example on how a property cycle works.

A capital city experienced an increase in population growth due to several factors (e.g. increased employment opportunity, strong economy, etc). As the population grows, demand for property also increases — both for rental properties from investors and new houses from owner-occupiers. With this, the value of property also increases because of the forces of supply and demand.

To respond to the increasing demand from renters and home buyers, developers and builders will begin building new dwellings. At the same time, investors and homeowners looking to capitalise on the price growth will also put their property on the market.

Over time, this leads to an oversupply of dwellings which eventually results in slumping home values, high vacancy rates, and rent reductions.

While the property market cycle has been observed in several real estate markets over the decades, there is no exact science as to when and how it will happen. The factors that can influence the cycle can also widely vary.

What causes property cycles?

As seen in the example we’ve given, many factors can affect the property market, such as housing supply, economic forecast, and government policies.

Here are some of the most common factors that can affect the property market cycle:

• Population growth
• Vacancy rates in investment properties
• Credit policies
• Consumer sentiment
• Infrastructure projects that can impact demand
• Economic outlook
• Unemployment rates
• Rate of property price growth
• Credit availability
• Inflation rate
• House price index

In Australia, some of the main factors that have driven the property market movement over the years are interest rates and population growth. The strong population growth in the country since the early 21st century has caused an increase in demand. Meanwhile, the low-interest-rate environment has spurred Aussies to borrow money to make big purchases, such as houses or cars.

How long is a real estate market cycle?

According to research, the average real estate cycle spans almost two decades. However, we use the word “average” loosely, as real estate cycles are unpredictable and the time span can be dramatically shorter or longer.

For example, in Australia, the average property cycle lasts between seven to nine years. Seven years is the sweet spot for most commentators because, historically, property growth in the country has peaked in the following years: 1981, 1987, 1994, 2003, 2010, and 2017.

As we’ve mentioned, the length of a particular property cycle can be affected by an amalgamation of factors and influences such as the state of the economy, as well as social and political issues. In some instances, the government lengthens or shortens the cycle by changing economic and tax policies while the Reserve Bank of Australia changes the cash rates to either encourage or discourage borrowing and spending.

And remember that while many people generalise about “the property market”, there are many submarkets around the country. This means that each state and territory can be at a different stage of its own property cycle.

Even within each state, the markets in different areas are segmented by geography, price points and type of property. This could mean that while some Australian capital cities and regions are currently notching new record median property prices, others have only posted marginal or even negative value growth in the same period.

Check out Smart Property Investment’s Suburb Search or our Research page to get a comprehensive snapshot of Australia’s property market.

What are the four phases of a property cycle?

Before we look deeper into the four phases of a property cycle, keep in mind that there are different names for each stage used by experts and sources. There are also sources that define the cycle as having three stages rather than four.

At the core of it, property market cycles are generally defined by the long-term recurring movement in the house prices. The phases discussed below are the stages that are popularly used in the Australian real estate market:

The boom phase

During the boom phase, which tends to be the shortest stage in the cycle, property prices increase at a rapid rate.

This phase usually starts slowly, as investors recognise that property returns such as rental payments and property prices are on the rise.

At this stage, property prices often sell for more than their asking price, as buyer demand outweighs the available supply on the market. This is also known as a “seller’s market”. Each boom sees an influx of new investors entering the market and at the same time would-be homeowners that drive up demand for houses.

Builders, developers, and existing homeowners also flood the market with properties to benefit from the higher prices. This eventually leads to excess supply, which leads to excess supply and an end to the boom phase.

Other observations during a Boom phase include:

• Rents rising to levels that put pressure on tenants.
• Significant reduction in property selling time.
• Surge in property prices.
• Easily accessible financing for home loans or investment loans.
• Real estate is a trending topic in the media, with market observers speculating on the direction of property prices but will subsequently focus on affordability constraints.
• Reports on increased home-buying intentions by consumers.

The slump phase

A boom phase is generally followed by what is called a downturn or a slump phase. During this phase, property prices tend to stop increasing and can sometimes decline.

In this stage, there is an oversupply of properties due to the over-exuberant activity of builders and developers during the preceding boom phase.

The slump phase is typically the longest in the property cycle. Experts say that the longer (and bigger) the preceding booms are, the longer and deeper the slump phase will likely be.

Other observations during a Boom phase include:

• Increased vacancy rates.
• Property investment cash flow is reduced.
• Increase in average selling time of properties.
• Stricter credit policies, making it more difficult to get financing.

The stabilisation phase

Markets don’t usually jump from a period of negative sentiment to the next upturn. Before the market recovers, various economic factors play catch up – they stabilise or get back into equilibrium. This period could be determined by the fundamentals of the economy, government policies, the reserves in cash and other factors.

However, don’t expect prices to begin escalating at an accelerated pace. During the stabilisation phase, buyers are more hesitant to return to the market. However, since the number of buyers and sellers in the market is in rough equilibrium, property prices during this stage continue to remain flat or only move up slowly.

This phase of the cycle is very critical to the market as it is the period that trust in the property sector is rebuilt, and the required environment to lead back to growth and the upturn phase is created. A decline in interest rates, increase in rents and suppressed demand during the slump phase is seen to set the stage for the next property upturn phase.

The upturn phase

Eventually, the cycle moves on and progresses into the upturn phase. This is the phase when vacancy rates typically slowly decline, rents start to climb the boom phase of the cycle, and property values begin its upward march once more, slowly but steadily.

At this phase of the cycle — which can last three or four years — property is generally affordable for most buyers. This is because at the beginning of the upturn phase of the property cycle, interest rates are usually lower than other periods and it is easier to get access finance.

Demand for real estate properties generally starts to increase in the inner ring, more affluent suburbs, and suburbs that are close to CBD. The demand is usually driven by owner occupiers looking to upgrade their homes.

At the same time, investors will also begin to enter the market, particularly those who are looking to take advantage of the increasing opportunities in the real estate market.

This is the time that many builders and developers commence developing projects, which will have a completion period that will coincide with the late upturn or during the boom.

At the end of the upturn phase, real estate prices have risen substantially.

As prices rise, property investment returns decrease. At this point, the cycle is about to start all over again.

When is the best time to invest in the property market?

Some investors see more opportunities during the upturn phase. For others, the boom period can be a gold mine if you play your cards right. So at what phase should you enter the market?

Generally, there is no one size fits all that can answer this question. Unfortunately, there is no foolproof way to pick the optimum time to invest in the market.

But understanding where the cycle currently is can help you decide whether or not to buy or sell property, depending on whether you think values are likely to increase, stagnate, or decline.

As long as you do your research and due diligence in order to make the right investment decision, there is always an opportunity for profit no matter what stage the property market cycle is at.

Smart Property Investment provides Australian property investors with must-have insight, strategies and real-life experiences to help guide successful buying and selling decisions in the Australian property market. Tune in to our podcasts covering a variety of topics related to the real estate market.

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