Understanding the Property Cycle When Buying

If you have been renting for a while and have now decided it's time to buy a property, understanding the cycles that the property market moves in can be extremely beneficial to picking when is the right time to purchase.

The property cycle is based around rises due to market growth, then plateaus and declines during certain phases. As someone looking to buy a home or become an investor, knowing where the market is and understanding the property cycle when buying will help you to secure the best price.

Based on the Australian property cycle history, the three stages of the cycle, increase, steady, and decrease, tend to confirm that property will always increase over time. Urban.com.au have put together this guide that you can refer to, to understand where we are in the property cycle and ensure that you are picking the most optimal time to buy.

The phases of the property cycle

There are four main phases of the housing cycle that will determine boom times and slumps. You may be determining how much to spend on your first house, and knowing these phases can help you get more value for your money. 

The four phases are:

1. The boom phase

The shortest of the cycle, the boom phase usually sees property prices increase quickly despite its slow start. As investors begin to notice a rise in property and rental rates, they begin to buy pushing the price of property up, often selling for more than the asking price. Everybody starts jumping on the bandwagon at this point, flooding the market and moving us all into the next phase.

2. The slump phase

The oversupply of property in the boom phase brings on the slump. The market is loaded with investment properties meaning vacancy rates increase the returns on rentals decrease. The previous rise in property prices come to a halt and sometimes even decline as new home buyers land in hot water, struggling with their repayments. Buyers often over-commit by purchasing properties they can't really afford in the boom phase, and a simple interest rate rise pushes them to the limit, forcing them to sell the property at a lower price.

3. The stabilisation phase

The phases as mentioned above, do not happen quickly or directly after one another, there is usually a period of stablisation in the market where things level out, prices simmer, and people regain their footing.

4. The upturn phase

Vacancy rates begin to fall and rent rise, and property values start to increase, giving a bit more swell to potential investment opportunities. The inner suburbs start to rise first, then those on the coast before the middle ring and outer suburbs follow suit. Property is most affordable in the middle of this phase, and those who have invested in property start to see favourable returns. This brings everything full circle as property values slowly increase as we head back to the boom phase.

Tips to navigate the property market life cycle

Successful property investment is reliant on good timing, amongst other things. Great timing and a long-term property strategy will lead to excellent outcomes from your investments. The following tips should be considered when looking at where we are in the property cycle, deciphering and then profiting from it.

• Always consider the Australian property cycle history

Based on the Australian market history, a cycle usually lasts for about seven years. There are around three years for the slowdown and approximately four years of rising prices. This does not, however, account for the dynamics of each individual market, which will determine the rise, peak, and severity of the cycle.

• Understanding triggers

Interest rates are one of the biggest triggers for movement in the cycle. Low-interest rates indicate opportune times to buy, and as they start to rise, the next phase is imminent. Another trigger can be migration and economic data. If the growth and economic indicators are moving up, then you should be ready for a growth phase. Good investing means looking outside of your area and paying attention to emerging hotspots that exhibit high capital growth and sound rental returns.

• Be a crystal ball

If Australia is experiencing strong economic stability and low unemployment along with low-interest rates (the end of the property slowdown), then the upswing could be near with an interest rate increase on the horizon. Recognising these things is almost like seeing the future, a skill that you need to acquire to invest well. The future growth of the specific market you are looking at can be seen with proposed infrastructure projects and areas in a significant growth stage are well-positioned for investment.

• Keep asset selection in mind

Understanding the cycle works in tandem with the right asset selection. Knowing the right time to buy in the property cycle is pointless if you buy the wrong house or apartment. Good property is a long-term asset; it should increase in value, which requires a robust market in strong demand.

What influences the property cycle?

Along with interest rates, there are other factors that influence the property cycle, and it is in your best interests to track and analyse them to understand where the cycle is likely to move. Some of the other key factors include:

• Population growth

Supply and demand dictates the property cycle. Population growth rises prices as demand pushing us into a stable phase. Keeping an eye on the developing population growth is a crucial part of your research process.

• Exchange rates

Foreign investors who are looking to purchase property in Australia will be keeping an eye on when the AUD is lower as property prices become comparatively cheaper, bringing more overseas buyers into the market.

• Unemployment

As mentioned above, low unemployment designates an excess of jobs, which is more attractive for investors, and high unemployment rates mean less value growth creating a more risky investment.

• Banks

Lenders who are seriously looking to write new loans affect the property cycle. Lending criteria is often tightened during the drop phase.

Different phases at different times

It is vital that you understand that the property cycle isn't a blanket rule for the whole country. The whole of Australia will not experience the same phase at the same time. There are many cycles in their own phases of growth and decline happening all at once throughout the Australian property market.

The factors that influence the cycle remain the same, but various cities and suburbs will experience them at different times. This is one of the main reasons why serious investors have a diverse portfolio of properties that exist in different property cycles.

Using the property cycle to your advantage when buying

Understanding the property cycle, it's influential factors and momentum will hopefully be a little easier for you know after reading all of the information above. This should also help you with knowing when is the right time to buy. Invest when the market has been stable for awhile, or in the growth stage before the peaks.

Try to navigate the dynamics of each micro-cycle and understand the various markets with research, what has happened in previous cycles, and the triggers that indicate movement. A safe bet is knowing that when interest rates are low, it is an excellent time to buy before the cycle moves to the next phase. If rates and prices are beginning to creep up, you may have missed the boat and will do well to wait a little while for a more efficient investment.

All of this also applies to those looking to purchase their first property as well. We have a range of blogs that can give you tips on how best to build your property portfolio while ensuring that you stay out of the red and on an upward swing.