It’s very likely that you’ve heard the term ‘property cycle’ – but you might not be entirely sure what it means.
The simplest explanation is that real estate markets – both locally and nationally – are continuously moving through cycles in which property prices rise and fall.
Property cycles can be driven by a range of different factors, including housing supply, buyer demand, the economy, population growth, the availability of credit, and government policies and incentives.
There are four key phases of a property cycle, which are explained in more detail below. They are:
- The boom
- The slowdown
- The slump
- The recovery
Predicting the exact moment when a cycle will move from one phase to the next is very difficult, but a better understanding of property cycles can help you make more informed decisions about buying and selling property.
The 'Boom' Phase
During the boom phase of the property cycle, property is a hot topic.
Interest rates are often low, and loans are easier to acquire. Homes tend to sell quickly – and it’s not unusual for them to sell for more than the asking price. These indications of a strong property market encourage more people to get in on the action, which increases market demand and keeps pushing prices up.
A recent report from CoreLogic revealed that house prices in Hobart have jumped by 300 per cent in 20 years, while the Domain House Price Report for the 2021 September quarter showed an unprecedented rise of 31.9% in the last year alone. Growth such as this can only be described as a ‘boom’.
The boom phase tends to be the shortest in the cycle. It begins slowly, but then gains speed as people try and benefit from the high prices. Developers, investors and homeowners start to flood the market with properties.
This kind of growth is impossible to sustain. The combination of high prices and excess supply bring the property market to a peak, and purchasing demand starts to slow. We then move into the next phase of the cycle: the ‘downturn’.
The 'Downturn' or 'Slowdown' phase
When the boom period comes to an end, we reach the downturn or slowdown phase of the property cycle.
At this point, there are still many sellers in the market, but the number of buyers has decreased. It can become more challenging to secure loans, sales slow, and growth flattens out. If the buyers who are still in the market can’t afford the high prices, properties remain on the market for longer and prices eventually fall.
How far each property market drops will vary significantly across Australia. The outcome will be influenced by a range of factors, including consumer confidence, income levels, affordability, interest rates, mortgage availability and government stimulation.
Due to so many varying local influences, Australia’s cities and states can experience very different positions on the property cycle simultaneously. Some cities and regions might still be seeing their highest ever prices while others are posting marginal or even negative growth.
Once we near the end of this downturn phase of the property cycle, the market stabilises.
The 'Slump' or 'Stabilisation' phase
The stabilisation phase of the cycle is a relatively calm period when all the economic and social factors influencing the property market find a new equilibrium.
The bottom of the cycle is an excellent opportunity to purchase a property because prices are low. However, it can be hard to pinpoint this moment until it has already passed.
Experts look for signs like a reduction in the time it takes to sell a home, a decrease in vendor discounting and more properties to enter the market before they are prepared to call a market ‘bottom’.
Eventually the market begins to move on. Although there may be fewer homes listed for sale, buyers will tentatively start coming back into the market. Falling interest rates, growing consumer confidence, and a steady economy all help set the stage for the shift into the final phase of the cycle – the recovery.
The 'Recovery' phase
The final phase of the property cycle is known as the recovery phase. At this point, prices have stabilised at an affordable level, and home buyers and savvy investors begin to re-enter the market.
Interest rates are usually low during the recovery phase, and it’s often easier to get finance, so the number of buyers starts to increase. Builders and developers begin work on new projects in anticipation of selling during the next ‘boom’, and confidence in the property market begins to improve.
The gradual increase in dwelling values and improved market conditions lead to higher demand from buyers, and so the market begins to grow again. Over time, growth will pick up speed, and the cycle will eventually move yet again into the next phase: another property ‘boom’.
In the meantime, buyers can enjoy more affordable real estate as we wait for the market to move once more through its natural cycle.
How does the Australian property cycle affect me?
What are the common trends of the Australian property cycle?
Property cycles can be hard to predict, even for experts, because the factors influencing the phases are so complex.
In general, each property cycle in Australia lasts around seven to nine years. But there is such a range of varying economic, social and political influences that it’s impossible to know for sure when we will switch from one phase to another.
It’s really important to consider the nuances of your city or state market, rather than just following what’s happening across Australia. An experienced local real estate agent with knowledge of your region will have insights into the behaviour of the market that you won’t be able to find elsewhere – this is especially true in Tasmania, where it’s not unusual for us to buck national trends.
If you’re a potential buyer, we recommend keeping a close eye on mortgage rates, and saving a decent deposit so that when the time comes to move, you can do so quickly.
Unless you’re planning to ‘flip’ a house, property is a long-term game, and you stand to gain the most if you are in the market over a period of years.
If you undertake a buy-and-hold strategy - keeping your property for at least 7-10 years - there will undoubtedly be downturn and stabilisation periods, but your average property growth rate will increase over that time.
It’s also important to recognise that what is considered a ‘low’ in the market today was once considered a ‘high’. This means it’s more important to focus on buying a property in a proven location than to buy during a particular phase of the cycle. A strong strategy is to look for areas with above-average long-term capital growth at a price suited to your lifestyle and budget.
The key is not to get carried away by a boom or disheartened during a slump. There is no ‘perfect time’ to buy or sell. If you purchased at the peak and your property price has dropped, it will increase again in time. If history is any indication, your property’s price will most likely surpass the previous cycle’s ‘boom’.
Whether you’re looking for your first home or an investment property, Tasmania’s resilient market makes it an excellent option for potential buyers.
It’s well worth seeking professional insight to make the most of current market conditions. Contact a trusted property advisor or strategist, or talk to us at Fall Real Estate to determine the best course of action for you and your real estate goals.
DISCLAIMER: The information on this website is not legal or professional advice and therefore is intended as a guide only.
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