Understanding the real estate property cycle
Have you heard the term "property cycle" floating around, but are confused as to what it actually means? Essentially, the phrase is used to describe the constant ups and downs of the real estate market. Because yes, despite common belief, property values don't always rise.
LJ Hooker’s Head of Research Mathew Tiller asserts that to get a clear idea of how a market is performing, you need to approach it at a micro level.
"From a national perspective, you could say the real estate market has continual growth. But, if you look at each individual state and market, than you can see that property fluctuates quite significantly, at different times as well."
Knowing where your area sits in the property cycle is one of the keys to a successful investment.
What Causes the Cycle?
Mr Tiller affirms that a property cycle primarily revolves around two factors: supply and demand.
"If demand exceeds supply, prices will rise, whether that's in terms of house sales or rent prices," he said. "If new supply comes into the market and exceeds demand than prices will fall."
Supply (the number of listings) and demand (the number of buyers in the market) are inextricably linked, and a change in one is likely to affect the other.
WA and NSW
A report from LJ Hooker Research put the NSW and WA property markets side-by-side to illustrate the perfect example of a property cycle.
Between 2004 and 2008 the population in WA surged by around 250,000, with an extremely low unemployment rate, largely due to the mining and resources boom. The increase in demand resulted in fierce competition, which pushed the median house price up 93 per cent during this period.
Meanwhile, at the same time the NSW property market was experiencing a contraction due to a relatively high unemployment rate, flat population growth and an elevated number of properties on the market for sale.
"The economic strength within individual states and regions plays a major role in determining the point at which a property cycle sits. If employment opportunities decrease then demand for housing, in those areas, can also decrease as household budgets tighten and the population moves out to other areas with better employment prospects." Mr Tiller said.
Fast forward to today, and we are seeing the exact opposite. Figures from CoreLogic RP Data reveal that over the 12 months to the end of August 2017, Sydney's dwelling values rose 13 per cent, while Perth's prices actually dropped 2.8 per cent.
When in the Cycle is the Best Time to Invest?
"The length of these cycles vary depending on the conditions of the day, but it does depend on the local economies of the various states," said Mr Tiller.
The CoreLogic RP Data Pain and Gain report found that houses that resold at a profit over the March 2017 quarter were held on average 9.1 years. This maintains the importance of viewing property as a long-term investment, and purchasing at the right end of the cycle.
Mr Tiller states the best time to buy is at the bottom of the cycle when homes are more affordable, then selling at the top of the cycle when you can garner the most profit for your investment.
How Can You Determine Where an Area is in the Cycle?
Mr Tiller recommends doing your research and speaking with your local LJ Hooker real estate agent.
"There are a number of sources available where you can view the property charts and where the median price of a suburb or an area sits in relation to where it was 12 months ago or two years ago," he said.