An in depth knowledge of property cycles is vital for property investors.
Learning about property cycles will facilitate the investment process and allow you to fully understand how property investment works.
The general consensus is that property investment should be seen as a long term investment. In order to get the most out of your investment, the value of a property needs a period of time to increase in value and/or you need time to pay down the principal to a meaningful extent.
Property investment can be lucrative if done right however, it is imperative that property investors understand what happens during the growth stage after the property purchase stage.
The value of property in Australia goes up and down, this is known as the ‘property cycle’. Knowing how the property cycle works will provide you with the knowledge to know when to buy and sell a property.
The Property Cycle
The property cycle typically takes place over a 7-10 year timeframe. Property prices increase, decrease and then they go through a stability stage. There are four stages to the property cycle:
Stable Opportunity Phase
The opportunity stage is when the property price is stable, most investors think that this is the perfect time to buy because the prices do not appear to be increasing or decreasing.
However, those with an in depth knowledge of the property market will know that when property prices stabilise, they are more likely to rise at this time. Therefore, this is not the best time to sell.
During the growth stage, the property prices start to go up, vacancy rates also decrease at this time and rental prices begin to increase, investor interest rises as they start to see potential in a particular area.
This can often start with inner metropolitan suburbs and then work its way out so that middle and outer suburbs will also experience some growth.
A good time to invest is in the first half of the growth stage. At the point the property prices are not too high or not too low. However, as the cycle moves into the peak phase investors can expect good returns.
The cycle enters into the peak phase when more investors recognise the potential in a particular area, recognising the investment opportunities during the growth stage, the prices increase. At this time, the market typically increases by north of 10%.
The peak phase is short and intense as investors frantically take advantage of the growth stage.
The peak phase is short lived and it often ends with with excess supply as property developers, builders and owners saturate the market.
The peak phase leads to the fall stage where there is an oversupply of properties on the market. This leads to a rise in vacancy rates, a reduction in rental returns and prices decrease or stabilise at this point.
What Influences The Property Cycle?
The property cycle is influenced by the following factors:
Population growth has a significant impact on the property cycle because when the population increases, the demand for properties increases. When the population decreases, the demand for property typically drops with it.
When you are researching property cycles and delving deep into a particular area, doing some research on population growth is worthwhile.
When interest rates decrease, it attracts investors and home buyers alike because of improved affordability.
Exchange rates influence the property cycle because when exchange rates are lower, this is good news for foreign investors. Property prices are generally cheaper when exchange rates are lower, thus attracting more foreign buyers.
When unemployment rates are relatively low, it drives more potential property investors. Why? Because low unemployment often points to an oversupply of jobs which is a good thing for rental returns and price growth in the area for property investors.
When unemployment rates are high, these areas are often considered high risk areas with little potential for growth.
Developments in the local area will typically increase interest in a particular place. For example, new roads, schools, hospitals and shopping facilities.
Bank lending restrictions and leniency can most certainly influence the property cycle. If banks are less willing to lend money to investors, this can affect the property market greatly.
When banks are more open to lend to investors this increases the amount of investors interested in purchasing property, which makes sense!
The good news is, at the current time, banks are relaxing their lending criteria.
When Is The Perfect Time To Buy ?
Understanding the dynamics of the property cycle is crucial, as it facilitates the decision making process. When it comes to property investment, knowledge is key.
Generally speaking, the best time to purchase is when the market is stable, the growth stage is close and the peak stage is in the distant future.
Things are not binary when it comes to property investment therefore, carrying out the necessary research is essential. Understanding the different stages and the factors that influence those stages is a vital component in your property investment journey.