The Australian Property Cycle

November 9, 2016

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By Gennavieve Lyons

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The Australian Property Cycle
Posted on Wednesday, November 9th, 2016

Keeping an eye on the market at all times is an important skill for investors and potential investors to accurately predict the ideal time to put their money to good use, as cycles may offer opportunities in disguise!

There are several factors that influence property cycles, including but not limited to:
-Social
-Economic
-Political

The cycle springs from population growth, which goes on to influence the demand for property. Lack of property supply enhances property value, which then boosts rents as demand stays strong. Property oversupply by developers and builders constructing new buildings results in rent reductions and growth standstills as demand diminishes.

Property values have a tendency to fluctuate even though cycles are well-defined. Each cycle is characterised by several circumstances that indicate whether or not it is a good time to invest.

The Demand Phase

The shortest and easiest phase to detect since property prices skyrocket in a short period of time. New generations of investors usually enter the market when the demand phase is in full swing. Newbies tend to be careless, overconfident and ready to pay a premium. This results in the asking price being higher than the selling price, thanks to competition between buyers. The demand phase comes to an end when the market is flooded with too many properties and the reserve bank boost interest rates.

The Stability Phase

The period of transition when things go back to the way they were when prices were average. The forces of demand and supply are once again re-balanced and the true values of properties are reflected. This is when some of the more savvy investors enter the market, estimating the potential worth of properties in areas that are poised for growth.

The Over Supply Phase

This is best characterised by an oversupply of properties, a decrease in investment returns and an increase in vacancy rates. A drop in property prices causes longer slump phase. Property selling by uneducated investors usually occurs in this phase which results in a deeper decline. Investors usually purchase homes they cannot afford because they are tempted by the cheap interest payments. However, during this phase many home buyers cannot keep up with their mortgage payments which eventually leads to selling their properties, further adding to the glut in the market.

The Absorption Phase

The opportunity phase for investors, as rents start to rise, vacancy rates starts to fall. This is a blessing in disguise for those who recognise an opportunity during the slow rise of property values.

When it comes to property cycles, there are clear distinctions between when the educated and uneducated choose to invest. Keep in mind thought that if you know what to look for there are opportunities in any market! As Warren Buffet states – Be greedy when others are fearful and fearful when others are greedy.

So how does the Australian market look right now? With investments in several Australian markets, here are my thoughts on where we are heading for the remainder of the year.

Sydney & Melbourne

After the growth spurt we have seen many ask if this will continue. While there are still micro-markets within these cities where you can still find good growth, on the whole I expect that we will see softer growth as these markets reach the end of this growth cycle. Prices are overtaking household serviceability, with many areas now seeing properties over the $1 million mark, so I expect these areas to stay flat for some time now.

In terms of the rental market there is a lot of new high density and outer development happening in Melbourne which is affecting rental yield growth. On the other hand, in Sydney, we are seeing a shortage of rental accommodation, so I predict that rental prices will start increasing in Sydney.

Other Capital Cities

Perth and Darwin are driven by the resource sector, with that in a downturn there is nothing to drive growth there. Looking to Hobart and Adelaide, these cities don’t have the fundamental economic and demographic drivers in place for any real growth right now, and I believe will remain steady.

Where to Buy?

With the Sydney and Melbourne markets hitting the peak, educated investors know to stay away while at the top of this cycle, unless you can get your hands on an entry level blue collar property priced below market value with positive cash flow.

For investors looking for the next boom my sights are on metro Brisbane and the Gold Coast. These areas were hit hard by the GFC and haven’t quite recovered, but there are early signs of that changing. You can still buy properties cheaper than you could pre-GFC, sometimes even cheaper if you were to build. Good rental yields are also making for positive cash flow investments. It is important to remember that there are micro-economies in each of these markets so thorough research and evaluation is needed before inking a deal.

Peter Mastroianni
Peter Mastroianni is a property finance expert and the co-founder of Loans Only, specialising in investment lending. He is the author of two top-selling real estate books and host of The Rentvesting Podcast. Peter is passionate about supporting the next generation of investors rethink the traditional home ownership model. He does this by championing the ‘Rentvesting’ strategy through www.rentvesting.com.au.

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