Understanding real estate cycles: When to buy and when to hold

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In the past three years alone the Australian property market has seen a once in a generation boom driven by the Covid-19 epidemic, experienced a slump generated in part by the 2022 interest rate rises, and now, towards the back end of 2023, asking prices are again on the rise as the interest rate looks to hold steady.

In other words - the property market is working its way through real estate cycles which are driven by interest rates, buyer confidence, supply and demand, government policies and subsidies, and other economic factors.

These factors can actually influence a multitude of property-related expenses beyond just the house price, including home and contents insurance, council rates, and strata management.

So how do you gain a proper understanding of real estate cycles in order to determine the best time to buy or the best time to hold onto property?

While no one can predict exactly which direction the property market will take, reviewing prior patterns and indicators can help you make a more educated decision when it comes time to buy or sell property.

When we talk about property cycles it is important to remember that different states in Australia can move through different parts of the cycle at different points in time.

There may even be different cycles within each state which can vary based on suburb, price point or even property type. Historically, there have been five stages to a cycle:

Cycles will generally start with a few years where property values rise before hitting an interval of strong price growth known as a 'boom', which is generally a shorter period of time.

As more vendors put more properties on the market for sale during the boom, prices may stagnate or even decline for a few years as supply outweighs demand, before the cycle repeats again.

You will often hear that a property cycle will generally last between seven and ten years, however the combination of specific economic factors occurring at any given time can change this - think back to the Covid-19 epidemic.

These economic factors including supply and demand, government rebates and the RBA interest rate can affect the length of each stage within a cycle.

Interestingly, the time between peaks appears to be getting shorter, based perhaps partially on the way we now receive property news which is almost in real-time.

While reports used to be confined to a weekly, monthly or even quarterly report, these days daily indexes exist on the property market, allowing for faster flow of information and a more volatile market.

A report by Matusik highlights the stagnant stage of the cycle and the number of years between peaks in the market.

Based on this data it is clear the length of the stagnant stage in cycles is declining and periods of overall property growth are increasing.

Ideally, if you are looking to buy and sell you want to aim to buy at the bottom of the cycle when prices are stagnant or declining, and sell at the top to maximise your investment.

There are both short and long-term indicators that can help you determine in which direction the market is trending.

Some short-term indicators that property values will increase are:

Lower interest rates: A lower interest rate allows a potential buyer to borrow more money, which can drive up the value of property.

Supply and demand: As with any commodity, if demand for property is greater than the supply, property prices will rise. With COVID-19 restrictions lifted, immigration has increased and demand for property has risen.

Access to credit: When banks tighten their lending criteria, it becomes harder for potential buyers to borrow enough funds for a new property. On the flip-side, when they ease their criteria, more people can borrow, demand increases, and so do prices.

Economic climate: Low inflation and high employment levels generally means buyers will have extra cash in their pocket to put towards a home deposit. The more potential buyers doing this, the higher property values will go.

Government grants: Government grants can help inject demand into the market by broadening the pool of potential property buyers and generating additional demand.

Consumer confidence: If consumers believe now is a prime time to buy based on any of the above factors, there is likely to be an uptick in the property market. Consumer confidence equals increased consumer spending.

Some long-term indicators that property values will increase are:

Demographics: Demographics are the characteristics that build the composition of a population such as age, race, household formation, household income or gender, and can drive what kind of properties are in demand. For example, during Covid-19 working from home became the norm, which meant many employees with families re-evaluated their needs in a home. Instead of being close to work in a smaller, inner suburb property, they could move to the outer suburbs or even countryside and enjoy a larger home, driving demand in that area.

Population growth: Population growth feeds into demand which we already know will increase property values. Overseas migration has also played a part in Australia's housing shortage for decades, and will continue to do so for the foreseeable future.

Wealth effect: The wealth effect occurs when property owners or investors feel more confident when prices of their homes rise. This in turn leads to an increase in consumption spending, which in turn helps the economy, ensures interest rates remain low, and builds a stronger property market.

Although it is not always possible to predict the direction the property market will take, keeping watch on some of the key indicators can help you make a more informed decision when buying or holding onto your property.