Like every other investment, residential property follows a cycle. Picking the best time to buy and sell to maximise profit often depends on understanding where you are in a cycle.
Conventional wisdom is that residential property follows a seven to 10-year cycle between peaks. Within those cycles are the usual value, growth, peak and correction phases.
But unlike other general asset classes, property is so segmented that individual residential property blocks can have a different cycle to a surrounding suburb or city.
Knowing where you are on a property cycle means following a strict process of understanding the macro and micro elements affecting your decision.
Local influences: In many areas local influences can be as narrow as being on the “right” or “wrong” side of the street/railway line when it comes to investment returns.
New infrastructure (roads, rail lines) can boost or deflate values depending on your proximity and access.
Likewise the release of new housing areas can affect demand and supply and, therefore, prices. A building boom means more stock and a dampening of prices.
Changing demographics within an area can either turn new buyers on or off and can narrow the appeal of properties.
Having the right property for buyers attracted to that area is a key element.
Property condition: Assessing the suitability and construction of an individual property determines the risk of any future costs to rectify problems. Those rectification/modification costs can be pretty hefty if they are unplanned, unexpected and unbudgeted.
City variances: Every capital city and major regional centres have their own unique influences which affect their cycle.
The Gold Coast goes through higher peaks and lower troughs than virtually any other property region.
It’s a real big boom/big bust kind of town.
Hobart is really at the mercy of the Tassie economy which, unfortunately, is in steady decline and has been for a few years now.
Darwin, like Perth, is driven by the commodities cycle and relies heavily on the prosperity of the resources sector.
The Sydney market is influenced by overseas migration numbers and the natural impediment of the Great Dividing Range on new land releases.
Brisbane is influenced by local migration from the southern states chasing the sun.
Adelaide and Melbourne seem to be more predictable around construction levels.
Economic indicators: Residential property tends to be a good barometer of a country’s economic health.
Maybe that’s why on a comparative global scale Australian property prices are among the most expensive in the world.
The most important economic indicators which affect property markets are:
– Unemployment: The more people out of work the less likely they are to be able to afford to buy or upscale.
– Interest rates: Lower interest rates mean lower repayments or ability to borrow more to trade up.
– Population growth: A baby boom fuels demand for bigger houses while migration increases the number of potential new buyers.
– Exchange rates: A falling Australian dollar makes our property prices cheaper for expats and foreign buyers using other currencies.
– Consumer confidence: Buying property is a big-ticket item. Low consumer confidence means buyers are less likely to take the risk of staying and more likely to stay put.
Where are we now?
Property guru Louis Christopher from SQM Research says our major capital cities are recovering from a two-year downturn.
That downturn saw residential prices drop 3-10 per cent from their peak. This year there is a modest recovery and he expects that to continue as long as there is no major global economic catastrophe.
PROPERTY PHASES: WHEN TO STRIKE
– Opportunity Phase: best time to buy. Beginning of cycle.
– Growth Phase: investors more confident as they see values rise.
– Peak Phase: inexperienced and timid investors pile in.
– Correction Phase: buyers over extend, banks tighten credit.