The Australian Property Cycle
The most difficult and yet one of the most important things for people to understand about the real estate market is the timing. Whether purchasing the family home or buying an investment property, how do you know, when is the right time to buy or sell? In certain circumstances your personal situation will dictate the necessity to buy or sell a property. If it is because of a marriage breakdown, financial demands, family reasons or job relocation, you may not have the luxury of choice.
Be assured though, whether it is a buyers market or a sellers market, there will always be homes for sale and there will always be buyers for properties. The days on market will vary greatly depending on the how the market is performing. Like many goods and services, property values are dictated by “supply and demand” basically, when there is a shortage of stock prices tend to rise, when there is an oversupply of properties, prices tend to slump.
To understand more clearly, you need to understand “The Property Cycle”. History tells us that property values rise in cycles. There are three phases of the cycle, an upturn in the market, a property boom and a market slump. These cycles occur because of a combination of factors, such as the strength of the economy and the social and political climate of the times.
There can be opportunities to maximise capital growth if buyers purchase properties towards the end of a slump or in the early part of an upturn phase. Buying at this time, when you think the market has bottomed, is not easily recognised, and certainly not for the faint hearted.
At this point, interest rates are generally quite low, vacancy rates are beginning to fall, which in turn increases the rental returns. The interest in homes for sale increases and house prices slowly start to rise, and as they continue to rise, days on market will lessen.
Property investors may begin to re-enter the market, seeing more favourable conditions for a return on their investment, lower interest rates and more easily obtained finance. Builders and developers start constructing more new dwellings as they see house prices on the rise and try to cash in on the profits to be made.
The media will start publishing more positive articles on rising property values which puts more confidence into the general public and first home buyers. These first time buyers then start checking out homes for sale not wanting to be caught out with house prices rising above their budget price.
The stage is then set for a “boom” to occur, the length and strength of a boom will vary from cycle to cycle. It may take some time for the less astute investors to recognise that increased rental returns are slowly pushing up property values, but once they realise and more first home buyers enter the market, house prices begin to increase quite quickly.
At this point, speculation and greed may well kick in, with investors buying off the plan in inner city or beach side apartments, hoping property values will continue to rise. Many buyers’ intentions were to on-sell these properties without actually having to settle on them. Sometimes these “speculators” would get burnt with the boom busting before the building of the properties was completed.
The rises in property values during a “boom” may vary in percentage or dollar value from state to state and city to city throughout the country. Past history tells us that properties in good locations may as much as double in a cycle, meaning every 7 to 10 years.
After a boom, and during the next phase we will see property values begin to drop, interest rates will generally have risen to combat inflation and often an oversupply of properties will be the major cause of the lower property values. This in turn increases vacancy rates and reduces the rental returns and impacts on cash flow.
Sadly at about this point the media will be painting a more negative outlook of the property market, which fuels panic and some investors may consider selling if they are struggling to meet their mortgage commitments. Outside contributing factors such as divorce, retrenchment or a death in the family can exacerbate the situation.
During the last “boom” period or as many call it “sellers market” properties were being sold in some instances, over the asking price in a matter of days, we also saw some property owners placing their homes for sale 5%-10% over the market value of the time and then patiently wait for the property value to rise to their asking price.
Whereas in a market slump or “buyers market” 120 days on market was commonplace. At this time there were many more homes for sale than there were buyers for properties. Higher vacancy rates pushed rental returns lower, and the cycle starts all over again.
There are times when property owners must for personal reasons, place their homes for sale, irrespective of what the market is doing. The important thing is to price the property at the perceived market value in the marketplace. It is a commonly known fact that in any market other than in an extreme boom market with escalating prices, that the best offer received by sellers is generally in those first crucial weeks. One of the first questions asked by the majority of buyers when inspecting a property is “how long has the property been on the market?”
Statistically the longer a home is on the market the fewer inspections are requested and the lower any offers generally are. Many sellers admit that offers received in the early days of being on the market were the best offers they had received and they would gladly accept those offers had they been made on their properties months later.
So what we are saying here is, it is about the perception of market or property values. The home owner’s personal opinion or perception of the value of their home may exceed the opinion or belief of the buyers in the marketplace. That is why many homes for sale will languish on the market purely because the house prices are unrealistic in the eyes of the buyers.
This is when you take under advice the opinions of experienced agents with factual documentation of recent sales data when pricing your home for sale. Some agents engage in the practice of “buying a listing” by over quoting property values, just to acquire the listing.
If there has been a wide range of house prices given to you by agents and you are unsure of where the property value sits in the marketplace it may be beneficial to employ the services of a registered valuer to appraise the home. The cost for this can range from $400 to around $700, depending on the company you use.
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