The concept that the property market moves in a cycle – one practically as regular as clockwork, is common knowledge. Prices go up, go down, even out and then back to increasing again.
There are some amateur investors who spend a significant amount of time trying to choose the perfect moment to buy so that they can maximise their profits when it comes time to sell. But believe it or not the property cycle has far less impact on buyers.
The Phases of the Property Cycle
How each phase is called differs slightly depending on who you talk to, but the consensus is that there are four major phases in the property cycle:
- The value phase: Prices are steady, so many people believe it is the right time to buy.
- The growth phase: Prices start to increase, gradually at first before moving faster.
- The peak: This indicates the zenith or top of the market. Prices will have risen very fast (up to 20 per cent year on year), but have reached the top most point of the cycle.
- The correction: Price moderation. This cycle is often believed to be a price crash, but there are times a correction is just a long, slow period where prices decline.
Generally, it takes about seven to 10 years for an entire cycle to complete, and it is ideal to see property prices double in one full cycle.
The Changes in the Cycle
Basically, the factors that influence one phase will directly lead to the next phase happening.
Following a stable period, market confidence will return and people will begin investing, which results in price increase. When prices increase, an increasing number of people will pile in, hastening the pace of price increase. Ultimately, affordability restrictions will cause prices to peak, before experiencing a correction to bring them down. When they reach bottom, there will be a period of stability, and the once will start once again.
However, the phases don’t move on their own accord. Many external factors contribute to change.
What are the Factors?
Whichever phase the cycle is in, here are the factors that you need to consider when deciding to buy or sell:
- How willing mortgage lenders are to write new loans
- The amount you can borrow to finance your purchase
- The general economic outlook and unemployment rates
- Local infrastructure projects (look at the websites of your local council and state/territory government)
- The rate of property price increase/fall
- Vacancy rates for investment properties
- The availability of properties that suit your requirements
In addition, property cycles are much more localised that most people know. For instance, it’s rare for each Australian capital city to be in the same phase of the cycle at the same time, as every market moves separately from one another.
Yet even that is rather a general overview. Every town and suburb can experience its own property cycle. One area may undergo rapid growth because of a new shopping centre being built while another suburb may experience little to no growth.
On the other hand, when a major source of employment closes or a natural disaster happens (like the 2007 Pasha Bulker floods or the 2011 Brisbane floods) a local crash can suddenly occur while unaffected suburbs continue to enjoy growth.
Essentially, you are the only one who can decide whether to buy or sell, taking into account various financial, legal, personal and emotional factors. After all, regardless of what cycle the property is experiencing, the ideal time for you to buy is ultimately when the right property becomes available at a time when you have the funds to buy it.