Watching the (property) clock

If you’ve read any coverage of the property market recently, you may be forgiven for thinking we’re on the brink of disaster. But the reality may not be nearly as grim as a lot of commentators would have us believe.

In fact, there are strong signs that certain Australian markets and sectors may be entering a new period of property market strength. Recent changes in various markets are encouraging many Australians to reconsider their investment strategies.

Understanding the property cycle is often considered the golden ticket to property investment success. Given that yields are typically strong across the bottom of the cycle and capital growth across the top, it is a sound and logical decision to buy property when the housing cycle is at the bottom of a downturn and sell when it is reaching the peak. The trick is identifying where particular markets and sectors sit within the property cycle.

The property-cycle has four phases – the value stage (slump), the growth phase (recovery), the peak (boom), and the correction (slow down). The whole cycle typically takes seven to 10 years. Typically, you’ll see two to three years of strong growth followed by seven to eight years of slow to moderate growth. However, there are many factors to consider which drive the property cycle – most of which are recurring – such as liquidity, economic growth, consumer confidence, investment returns, scarcity of supply and rising demand.

At the bottom of the market, rental yields are strong, and the confidence in the market is quite low. These characteristics provide investors with five to seven-year investment goals the opportunity to take advantage of strong yields, while waiting for the property increase in capital value.  At the peak – also known as the “seller’s market” – rental yields are weak, confidence is high, and there are commonly more buyers than sellers, providing those investors who purchased at the bottom of the cycle a healthy market in which to sell.

Unfortunately, emotions often dictate investment decisions.  During the boom period, people often buy due to the fear of missing out. People also frequently make the opposite mistake and resist buying at the bottom of the cycle because they think the property market is under-performing.

Every Australian region and property sector sits at a different point on the property clock. If investors can remove emotion from purchase decisions then when one location or sector is overheating, there is invariably another sector or asset class ready to meet their goal of yield or capital growth.