You may have previously heard the term – “property cycle”, or more specifically that property prices typically move up-and-down within cycles. But what does this actually mean, and how does this influence when you should purchase or sell a property?
The Property Cycle
A property cycle primarily revolves around two key factors – the supply and demand of property. Supply refers to the number of properties for sale at a given time, and demand refers to the number of people searching, and able to buy a property. It’s important to note, there will always be a difference between the number of people who are simply searching or looking for a property, to the number of people who can actually afford to buy a property.
When demand exceeds supply, property prices will increase – as committed buyers compete to secure their preferred property. When there is more supply than demand, prices will drop. And when supply and demand are in equilibrium, prices will typically remain consistent.
Historically, median house prices across Australia tend to increase and decrease (i.e. fluctuate), with a general upwards trend over the long-term. This up-and-down cycle can be divided into four key phases, with an entire cycle usually lasting between seven and ten years – sometime shorter, sometimes longer – depending on key factors.
Whilst there is no exact science when it comes to predicting when a property cycle is going to move to the next phase, there are some factors that can influence the cycle. These are:
- How much money a buyer can borrow and therefore spend on a property purchase
- Broader economic outlook, business confidence and unemployment rates (particularly within the suburbs you are searching for)
- Local infrastructure projects that can impact demand for a region
- Whether there are suitable quality well-presented properties on the market to suit buyer needs
- Interest rates – and whether they are increasing or decreasing.
As highlighted earlier, there are four key phases to the property cycle: Boom, Peak, Downturn and Upturn.
Boom –The boom or growth phase is when prices are rising. Typically, slowly at first, and then rapidly as more people compete to secure a property. During this period, many buyers are interested in property. It’s easier to secure a loan, interest rates are generally lower, and property tends to sell quickly, and for more than sellers expect. Typically, many people start buying property, expecting prices to continue rising.
Peak –This is when prices have reached their highest level, or their peak. Prices may have risen so much within key areas, that buying a home simply becomes unaffordable for many buyers. At the same time, many sellers become motivated by the high prices and start selling their homes, hoping to get the best possible price – thereby increasing supply onto the market.
Downturn – After the peak, the next phase is the ‘downturn’, or correction. This is when prices start to decrease or growth remains relatively flat, often because there are more sellers and less buyers competing (due to affordability constraints). It can become difficult to secure a loan or borrow as much during this phase. Typically, homes take longer to sell, and prices begin, and continue to fall. At the bottom of the cycle, fewer people list their homes for sale, but there are still buyers looking for great deals. Eventually, low supply and ‘low prices’ leads to an increase in demand again, leading to the next phase, the Upturn recovery.
Upturn –This is when prices have remained low, or stagnant, for a period of time. Buyers begin to feel confident about re-entering the market. Buyers are able to secure credit and it is relatively easy to obtain a loan. As buyer sentiment improves, the market enters a boom period once again.
When should you buy a property?
It goes without saying, it’s always favourable to buy a property at the lowest point in the cycle. This is because prices have the most to rise long-term, but the difficulty is that it’s often harder to borrow as much money at this time.
It’s also difficult to ‘guess’ the exact bottom of the market. Typically, we only know when the bottom of the market has occurred, after it’s already happened. Furthermore, during a downturn, there may be limited property stock with fewer properties for sale. There may be a lot of negative sentiment in the market, which can cloud judgement and confidence too.
However, it’s important to remember buying a property should be a long-term investment – and it’s critically important to buy a quality asset, in a quality location. If you can hold a property for 20+ years, it reduces any negative effects of buying when prices are at the peak of the cycle. Furthermore, in theory, if you hold a property for 20+ years you may be able to ride out two boom cycles.
It’s important to remember that different cities and states are usually at different points in their property cycles. While one might be in a downturn, another might be experiencing a boom. Finding out what your local market is doing is critical to help you make informed and positive decisions. Your local One Agency specialist, lives and breathes real estate in your area and has insights into exactly what is happening in your community.
Always seek advice from a trusted professional.
Purchasing and investing in real estate is exciting and when done well, can significantly transform your life. Now is a great time to get started on your property journey, or continue climbing the property ladder, as interest rates are at an all-time low. Our agency is also seeing high-quality family-oriented supply begin to come onto the market, and this is set to continue as we progress through Spring and approach Summer.
To learn more about the benefits of real estate investing and what prices may do long-term, please contact us at One Agency. With One Agency being one of Mildura’s most trusted real estate agencies, we are well placed to provide you with our view of the current market based on our local experience. We’ll thoroughly guide you through the process and help you take advantage of this opportune time in the property market.