Property news can be a source of panic for prospective buyers, especially when the headlines scream doom. Knowing how property cycles work can alleviate this stress, while helping you know when it’s a good time to invest – and just as crucially, where.
Jacqueline So reports…
When you turn on the TV or browse online, the property market is often discussed as something that fluctuates constantly and significantly. There is generally talk of booms and bursting bubbles, as if they are ‘sudden events’ that arrive without warning.
In reality, these terms are often not entirely accurate descriptions of what’s actually happening in the market.
The media tends to hype up movements in the property industry, without giving due credit to the true stages of the property cycle in each market. Knowing how this cycle works can not only ease your fears, but it can also help you plan your next move.
Correcting property cycle perceptions
The property market cycle typically has four stages: growth, peak, bottoming out/correction, and recovery. Generally, the cycle begins with a period of consistent growth in property prices, which eventually slows and stops to indicate that the market has peaked. As it normalises, dwelling values may decrease over a period of time. Once prices even out, buyer interest begins trickling back in to spark growth and restart the cycle.
Many people think of the correction stage as a time in which the market crashes; however, what really happens is that prices merely wait to reach a point where they stagnate. This stage can be a long, slow period as values stabilise to adjust to new market conditions.
An entire cycle can take anything from 8 years to 20 years to run through, depending on the location, so investors have to be prepared for the long haul. Weathering the storm of decline can be to your advantage, once prices pick back up, as in a full cycle, property values can double (or more).
Moreover, cycles are highly localised – each state maintains its own cycle, as does each city, town and suburb.
A property cycle doesn’t move automatically, however – there are several factors at work in pushing each phase forward, largely driven by economic performance and supply and demand.
Bursting the property bubble myth
“Property bubble” is another term typically tossed around in the media. A bubble is created when property values are too high as a result of rapid growth, and the market can no longer be sustained. Therefore, the bubble may burst dramatically – as has happened recently in some mining towns – or the air will be let out slowly, through gradual price declines.
Sydney and Melbourne have recently been tagged with this label, given their high property prices and investor-led growth over the last few years.
With interest rates so low at present, driving both homebuyer and investor activity, the bubble-bursting fears expressed in the news has reached fever pitch. However, research shows us that there is actually an unlikely chance of the market crashing in this way.
Historical data suggests that expensive markets typically adjust eventually during the correction stage. Furthermore, interest rate increases are not expected to derail the market, because such boosts are tied to a rising economy. Thus, buyers have higher salaries and more equity, along with enhanced consumer confidence.
Mortgage markets restore faith?
There are many other fears that are holding investors back from committing to their property goals, but most of them can be overcome through education, research and decisions steeped in common sense.
For instance, many people harbour fears around money and mortgages – either to do with taking on too much debt, or being unable to borrow enough money to achieve their goals.
Ironically, the policies implemented by APRA over the last few years, which do complicate the process of getting loans, may actually reassure you.
After all, they were designed to limit the chances of a market bursting, while also making sure borrowers don’t get in over their head financially. This strict approach differentiates Australia from other countries that have had their property bubbles burst, because banks are not as exposed to massive risks – a key distinction between Australia and the USA.
Ultimately, the Australian property market cannot always be predicted. Even with the benefit of historical patterns and rich data to draw from, there is always an element of risk involved. It’s important to always keep an ear out for the latest news, but don’t let the latest headlines drive your fear; the key to success is to determine an area’s growth potential based on true research, not media exaggerations.