In Australia, where real estate is basically a national hobby, people know that property prices fluctuate and that a period of growth will almost always be followed by a slowing of the market. But understanding why this happens can prove a little more elusive.
Let’s take a dive into the property market cycle and discuss what it is, what influences it, and where we are in the cycle right now.
What exactly is the property market cycle?
Property prices change over time, generally following a pattern that sees a rise in values followed by a period of stagnation or decline before another upturn starts. This repeating pattern of highs and lows is what we refer to as the property market cycle.
Most experts in Australia refer to four distinct stages in a single cycle: the boom, the downturn (or slump), the stabilisation, and the upturn. The following graph illustrates the cyclical nature of the property market in Australia and how the length of each cycle has varied over the past 18 years:
It’s not only the duration of each cycle, but the length of each phase within a single cycle that can vary depending on the socio-economic landscape and the peculiarities of each market; a short sharp boom may be followed by an equally short downturn or a long slump, or vice versa. What is clear is that one stage of the cycle inevitably follows the other.
But what does each stage entail, and what causes the market to shift from stage to stage?
Let’s break it down.
The boom: what it is and what drives it
During the boom phase, which is usually the shortest stage of the cycle, property values will increase rapidly, sometimes by huge margins.
The market is often spurred on by buyers, both investors and new homeowners, wanting to get in on the action, and demand quickly starts to outstrip supply, pushing the prices ever upwards in a seemingly impossible spiral.
We’ve seen this happen over the past couple of years, with national property prices increasing by a whopping 28.6% as we navigated our way through the pandemic.1
Often referred to as a seller’s market, a boom will see developers, investors, and owners putting more and more properties on the market to benefit from heightened competition among buyers and achieve far higher prices and faster turnarounds for their properties than they would at any other time.
Eventually, the continued influx of stock onto the market tips the scales, and supply begins to outweigh demand, signalling an end to the boom.
The downturn: what it is and what drives it
Oversupply is the primary driver of this next phase, although there are several other mitigating factors such as our current inflationary cycle and consequent interest rate hikes, consumer confidence, or stricter lending policies.
In a downward turning market, it will take longer for properties to sell, and they will often sell for less inflated amounts. Many experts say that the more extravagant the boom, the longer and deeper the downturn, although it’s impossible to generalise, as specific markets respond differently to changing economic circumstances and pressures.
Australia is currently experiencing a downturn, with property prices falling by -1.3% in July, according to the latest CoreLogic research.2
This trend, which started before the RBA began to increase interest rates, is being exacerbated by monetary policy and the current cost-of-living crisis that is being fuelled by an international inflationary trend and current geopolitical conflict.
The stabilisation: what it is and what drives it
Eventually, the factors that sparked a downturn will start to ease, interest rates will start to fall again, the wider economy will move towards a growth phase, and consumer confidence will start to grow once again.
However, there is not usually an immediate switch from a slump to an upturn. Instead, we tend to see a period of stability where supply and demand are roughly in balance, and there is a cautious testing of the waters as buyers make a tentative return to the market.
During this phase, property prices usually remain flat or increase only very slowly. It’s an interesting time for investors who can spot it as it heralds the coming of the next upswing in the cycle.
The upturn: what it is and what drive it
As momentum picks up, the cycle takes an upwards trajectory, heading towards the next boom phase. Property values start to rise, though still relatively slowly, and, as buyers sense the coming bull, demand begins to drive the market forward at a growing rate, especially in more sought-after locations.
During the upturn, we will often see developers and builders becoming more active as they see the potential of the coming boom, and by the end of this phase, property prices will be rising rapidly as demand once again starts to outstrip supply.
What can we expect now?
As noted above, we are currently in a downturn, with property values having fallen three months in a row, according to CoreLogic’s national Home Value Index.3
While it’s impossible to predict how long this slump will last or how severe it will be, experts generally agree that the downwards trend will continue into 2023 as the wider economic climate forces interest rates up and consumer confidence down. Most pundits agree that once these trends stabilise, it is likely that the property market will too.
It is also well worth remembering that the falls we are seeing at the moment are very small compared to the astronomic gains of the past two years. In fact, in some sectors, the market is still growing, albeit a little more slowly.
Whatever the case, the fact remains that the property market is a cyclical beast, and this current dip will inevitably be followed by a period of buoyancy.
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