What is the property cycle doing right now? It is made more complicated because supply and demand varies so much around the country and that is what impacts the cycle. So how do you read it? Damian Collins is our guest as he speaks from experience having witnessed the roller coaster WA market twist and turn.
Kevin: Look, we all know that there is a property cycle, but let’s try to get a bit of a handle on what makes the cycle, where are we at, does it change, and what impacts it? To answer some of my questions about this, Damian Collins joins me from Momentum Wealth in Western Australia. You can catch them at their website, MomemtumWealth.com.au.
Damian, thank you very much for your time.
Damian: Glad to be here, Kevin.
Kevin: Demystify this thing for me, the property cycle. What’s a cycle in period of time?
Damian: Kevin, the property cycle is generally over a longer period of time – anywhere from 5 to 12 years – and during that cycle, you will have periods of time where property demand is outstripping supply and then you will have periods also where supply is outstripping demand.
One of the big important things with property is it takes so long for a product to come to market. If you want to provide more properties, developers bring them to market. By the time they get them through planning systems and so forth, it’s a couple of years, and that’s why you can have then, periods – like Sydney and Melbourne, particularly in the last couple of years – of seeing a shortage of stock and that has caused their prices to go up. Conversely, in Perth particularly, but to a lesser extent Brisbane, we’ve seen an oversupply in the mining era. That has caused too much supply, and that has caused their prices to stagnate or even decline.
Kevin: There is no one property cycle. We’re all at different stages in different parts of the country, aren’t we?
Damian: Definitely. You would suggest that Melbourne and Sydney, if you look at the old economic clock or the circular clock, they’re towards their peak of their cycle, if not at the peak, and Brisbane and Perth – and particularly Perth – are at the bottom. Brisbane really hasn’t done much in this last cycle, so I think that has still got some legs.
But also, Kevin, interestingly, even different types of property within a market can have different cycles. In Perth at the moment, some sectors are running very strongly; other sectors are running very softly. In Brisbane, we’ve certainly got oversupply issues with apartments but general houses are still going okay.
Yes, there’s not one property cycle across the country, and even in a particular city, there are different cycles within the property market as well.
Kevin: When you are looking at investing for the people who work with you, is the cycle one of the things that you look carefully at and try to pick where a market is and where it is likely to go?
Damian: Definitely. Look, when you’re investing in property, generally, for our clients and most people out there, for passive investment, you’re looking generally at a ten-year time frame. So, the first point is to go down to what are the best locations that are likely to out-perform over a ten-year period? We have a number of cities, four major cities in Australia, that have the demographics, the population growth, the industries to sustain long-term property price growth.
But then, from there, you start to look at where are they in the stage of their cycle? For Sydney and Melbourne for the last 18 months to two years, they have been getting towards the top. Who knows exactly when that is going to finish. Obviously, Brisbane has gone up a little bit, and Perth has actually come back a little bit over that last 12 months. So, you do certainly look at that.
I guess it still comes down to investors’ confidence. A lot of investors still like to stick with their home city. And if you have got a ten-year horizon and investing in Sydney, Melbourne, Brisbane, or Perth, I think you are going to do pretty well, but it is nice to get that free kick of a nice 15-plus percent upswing if you get in early enough in the cycle in that particular city.
Kevin: Yes, I guess you wouldn’t be terribly concerned about the cycle if you were really in the market – not trying to time the market necessarily but just spending time in the market, Damian?
Damian: That’s right, Kevin. I’ve seen a lot more money lost by people trying to time the market than by buying at the wrong time, particularly again, in major cities. Obviously, a difference in regional areas where they can be far more volatile, but in major cities, I’ve seen people hold out and go “Oh no. I will wait for it to drop.” Well, property doesn’t often drop, and when it does drop, residential in the major cities doesn’t generally drop a substantial amount. I have seen people wait and wait, and they end up often doing nothing, and they miss out potentially 30% or 40% growth over a cycle.
Certainly, everyone wants to buy at exactly the bottom of the cycle and sell exactly at the top. It’s just realistically not likely to happen, and the best thing to do is when you’re ready and comfortable, as long as you have a long-term horizon and do your research, look carefully and get into the market.
Kevin: You have mentioned earlier in our chat that supply and demand is a big indicator. Is that, in fact, one of the major indicators about what’s going to happen on that clock?
Damian: It definitely is. Your demand is driven by population growth. That is the big one, and that’s one of the reasons why Melbourne is strong – their 100, 000+ population growth a year. Sydney is not far behind.
So, you have population, but to get the population growth, you need strong industries. The mining cities did very well in the mining boom. Obviously, that has tapered off, but actually, the mining sector is starting to recover again, so we’re starting to see marginal changes in population there.
So, you need the population growth, the industries, but of course, as I said earlier, the developers start releasing more land or bringing more apartments to market, but because there is such a long time period, often by the time they’ve built them, the cycle could have changed.
But I think one of the big things is an intangible one. It’s not just about number of houses and jobs; it’s confidence. Sometimes you do see people, particularly when they’re in that particular market, the confidence is perhaps over-optimistic or too pessimistic. It’s very much human nature; we tend to look at most recent history. People in Sydney and Melbourne at the moment, probably think it is going to keep going up forever, and people in Perth have the negative mentality, “Oh, it’s never going to go up again.”
History shows it always recovers and always peaks again. It’s been doing that for hundreds and hundreds of years, and it won’t change because that’s the nature of humans.
Kevin: Always good talking to you. Damian Collins, from Momentum Wealth. Thanks for your time, Damian.
Damian: Pleasure, Kevin.