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How Property Cycles Work
There is a lot to learn when it comes to gaining knowledge about the real estate market. One area that is important to understand are property cycles and what it means to both buyers and sellers within the property market.
Realistically, the property industry revolves around 2 key factors. Supply, and demand. And generally, the industry trends typically tend to reflect the following 2 statements.
- When demand is high but stock is low, property prices will increase.
- If supply is high but demand is low, prices will reflect a decrease.
So, with this knowledge in mind, let’s talk about the term ‘property cycle’, what it means and more importantly, how it can influence both buyers and sellers.
State of the Property Market
First, we’ll need to look at the national trends over the last 10 years. From 2010-2020, Around 1.5 million properties were built in Australia. However, due to the pandemic & work from home trends being more popular than ever before, net migration to capital cities fell to an all time low.
This saw properties in built up areas drop rent costs as supply outstripped demand. A large portion of those moving away from the big cities found cheaper & larger properties in areas where there wasn’t much demand, shifting the market ever so slightly.
However, over the last 12 months, we’ve seen this correct itself with international migration spurring Australia’s population growth.
Why the Fluctuation?
Depending on where you live, you would notice that the market value of properties often varies.
Of course, you might be wondering, why the fluctuation?
It’s simple. As house prices rise due to short supply, investors looking to turn a coin try and take advantage of the short supply.
This means a sudden surge of properties for rent or sale and drastically reduces the need for supply. As a result of this, the market becomes more competitive which results in rent reductions and depreciated home values.
There’s no real scientific formula or mathematic equation that you could use to predict a turning property cycle, however, if you are on the ball, you might be able to notice then following factors before the market does a 360.
What can influence a property cycle to change?
Generally, there are many factors that can contribute to a sudden property market switcheroo besides obvious factors like inflation or demand shortages.
For example, as of right now, less properties are likely to be bought by first time owners or landlords looking to grow their property portfolios due to mortgage rate increases.
On top of that, landlords within the private renting sector are being slammed by legislative changes across the board like the banning of rent bidding & no grounds evictions.
Small legislative changes like this within the private rental sector can cause a property cycle shift to where a lot of existing landlords are selling up. This could quickly see the market being impacted by more supply than there is demand.
Other factors include the willingness of lenders to provide finances for home loans, local infrastructure projects that can disrupt demand or even market needs. The list truly does go on.
The Four Stages of a Property Cycle
Seller’s Market
The first stage of a property cycle.
Property prices and rental income within this stage tend to soar above market value due to the demand for stock.
At this point, the power is entirely within the seller’s hands as property investors and developers rush to add stock to the market to profit from price increases.
New projects and developments spur ahead by eager investors that want to get ahead of the curve. Supply continues until the demand for property lowers.
The Downturn
Due to rigorous bombardment of supply, it now becomes a buyer’s market. There’s plenty of stock available in which buyers can choose between. Rates become competitive and investors compete on price, lowering the price tag of properties.
As of October 2022, we could potentially see a downturn within the property market due to the recent announcement of mortgage interest rates soaring.
This not only has an impact on a Lender’s likeliness to borrow, but it also adds to an ever-growing list of rising costs for landlords within the private renting sector.
Many landlords are trying to combat the growing costs of renting by using property management software to effectively manage their portfolio, but not all are on board. Some are just simply tired of the feeling that the market is heavily tilted towards tenants and that there’s not much support for property investors.
Stagnation
As suggested by the name, the sudden surge of stock stagnates, and the market once again becomes stable. Property prices and rental income evens out, and average market values drop.
Lenders are likely to open the books once more and investors will start trying to get more out of the market before any further instability.
Confidence on new projects & developments start to rebuild, so investors will start flocking to the property market once more.
Population growth starts to outpace property supply, so once again, prices start rising & an upturn begins.
The Upturn
As prices continue to increase over a period, more sellers are likely to enter the market.
Buyers are more likely to pull the trigger as they’ll notice the price increases come into play. Typically, you’ll see that this stage is followed by a slight recession due to plummeted pricing and over-leveraged bankruptcy.
Once again, the cycle is complete, and the market re-establishes itself as a seller’s market. The trend continues and so forth.
Hopefully this has shed some light on the stages of property cycles, what they mean to you and how you could potentially use them to your advantage. If you would like to discuss how to take advantage of property cycles in your property investment journey, contact Search Party Property.
