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Where are we in the property cycle?<\/strong><\/p>\n Many property investors would give their second garage to find out the answer to this question.<\/p>\n After 12 months of booming real estate markets around Australia there is now talk about slowing price growth and even falling house prices.<\/p>\n In fact, a few of the regular property pessimists are even predicting the property market will crash in 2022.<\/p>\n By the way\u2026they\u2019re wrong!<\/p>\n But all this makes it a good time to learn a little about property cycles.<\/strong><\/p>\n Looking back at how previous property cycles played out, I delved back into my memory to see what lessons I could learn from past property cycles and realised that I\u2019ve probably learned more from the many mistakes I\u2019ve made than from the things I got right.<\/p>\n Now there\u2019s a powerful lesson in itself!<\/p>\n Of course, we all know that markets move in cycles.<\/p>\n Economic growth is not a straight line, and neither is property price growth.<\/p>\n Essentially the property cycle is the measurement from a peak in property prices through a slump, then a flat period, and back to the next peak again.<\/p>\n Trying to interpret the cycle is what leads commentators to make predictions or forecasts. But they usually get it wrong.<\/p>\n Typically the cycle is depicted in 4 stages.<\/p>\n The boom<\/strong> is followed by the downturn<\/strong>, which is followed by the stabilisation<\/strong> phase, which leads to an upturn<\/strong>, which in turn sets us up for the next property boom.<\/p>\n I\u2019ve drawn it as follows:<\/p>\n I\u2019m often asked how long between one property cycle and the next and while many market commentators refer to a \u00a0\u201c7-year property cycle\u201d, it is rarely seven years.<\/p>\n In fact, average Australian capital city prices have had multiple cycles over the last 20 years with booms around 2003, 2007, 2010, and 2017 \u2013 which was the last time property prices peaked on the east coast of Australia before this current property cycle.<\/p>\n Earlier this year house prices once again reached the previous peaks of 2017 and have now surpassed them. <\/p>\n The fact is, the length of a property cycle has nothing to do with the number of years.<\/p>\n Cycles are driven by a series of socio-economic factors, but over the years I\u2019ve noticed that the nature of our property cycles is changing and seem to be getting shorter.<\/p>\n Also, the cycle is better seen in terms of the rate of property growth, as not all downturns or bust phases have price declines, some just experience a slowing.<\/p>\n Of course, the cycle can also vary from city to city.\u00a0<\/strong><\/p>\n And there are even cycles within cycles within each capital city.<\/p>\n The current property cycle has been quite unusual as almost all housing markets around Australia, both capital cities and regional locations, have exhibited strong price growth in 2021.<\/p>\n But again, not all parts of the property market are in sync \u2013 just look at how poorly CBD high-rise apartment towers and apartments near universities have performed.<\/p>\n The main factors driving the property cycle are:<\/p>\n I don\u2019t think anyone can be a proficient property investor until they have invested in and survived at least two properties cycles.<\/p>\n History tells us that this cycle generally lasts for about seven years with three to 3 to 1\/2 years of a slowdown and a flattening out of house prices, followed by 3 to 1\/2 years of rising prices and so on and so on.<\/p>\n But it varies from state to state \u2013 for example, Brisbane and Perth both missed the previous big upturn in the property, when Melbourne and Sydney experienced in a boom 2016 and 2017 17<\/p>\n As a history student of history, you learn that cycles are driven by human emotion \u2013 fear and greed as well as the availability of credit, more than changes in interest rates.<\/p>\n Just look at what APRA<\/a>\u2019s changes in 2014 to 2017 did to investor activity and how that slowed down the property cycle<\/p>\n In the past Sydney has generally been the first market to fall and to rise, followed by Melbourne and then the rest of the country behind that. And each market operates inside its own dynamics, which can dictate the rise and peak of the cycle and its severity.<\/p>\n Interestingly the current property boom is different from any other cycle I have seen for almost 3 decades. Almost every property market around Australia has had strong growth over the last year \u2013 other than that in the CBD apartment market.<\/p>\n But here\u2019s where it gets tricky. If it were just a case of simple sums add seven and abracadabra you\u2019ll know exactly what the market is doing there wouldn\u2019t be tales of financial hardship experienced particularly by investors during property slumps.<\/p>\n It looks like the current property cycle will be considerably shorter than the 7 years, as we had seemed to miss the stabilization stage of the cycle and jumped straight into the boom stage from October 2020 moving forward.<\/p>\n And of course, property price growth has been stronger than we\u2019ve seen for about three decades and this level of growth is unsustainable in the long term considering the slow growth in wages and therefore affordability.<\/p>\n Now that we\u2019ve determined that it\u2019s not just a simple case of doing the sums, the next step to mastering the property cycle is understanding what triggers the peaks and the troughs.<\/p>\n The most obvious factor is interest rates. When interest rates fall, and money credit is easily available, property values grow strongly as has happened over the last couple of years.<\/p>\n This leads to FOMO \u2013 the fear of missing out and a herd mentality where people rush into by just because of everybody else\u2019s.<\/p>\n On the other hand, when interest-rate start to rise a nervousness and cautiousness creep into the market.<\/p>\n All prior slumps have been the result of either a significant<\/em> increase in interest rates or the tightening of the availability of credit by our regulators.<\/p>\n Rising interest rates don\u2019t only make mortgage repayments less affordable, but they also affect general business confidence.<\/p>\n Migration, from overseas and between states, is another key factor.<\/p>\n The Federal government recently announced that will reopen our international borders and fast-track our immigration program particularly for skilled migrants, and this will impact underlying demand, fueling our property markets.<\/p>\n Economic factors can help send the property market into decline when we have our cyclical economic downturns, but similarly strong economic growth leads to jobs growth, wages growth, and often population growth and this helps the market reach record heights.<\/p>\n Now\u2026here are 4 key lessons I wish I\u2019d learned earlier in my investment journey about property cycles:<\/strong><\/p>\n And the main cause behind these cycles is that we\u2019re human and tend to share the general optimism or pessimism of others.<\/p>\n As I\u2019ve already explained, it\u2019s a common fallacy that Australian property cycles last 7 \u2013 10 years.<\/p>\n Cycles vary in length and are affected by a myriad of social and economic factors and then, at times, the government lengthens or shortens the cycle by changing economic policies and particularly by manipulating interest rates or the availability of credit. Back in 2016-7 APRA<\/a> and the RBA fiddled with the availability of credit \u2013 either the cost of money such as interest-rate or the availability of money such as tightening the screws to \u201cmanage\u201d our property cycle, but of course last year the lockdowns forced by Coronavirus put the nascent property cycle on pause.<\/p>\n Then over the last few years historically low-interest rates have made holding on to properties very cheap and the markets have boomed<\/p>\n It\u2019s my observation that investment markets often \u201covershoot.\u201d<\/p>\n That is, they move by more than changes in the fundamental influences would seem to require \u2013 on the upside as well as the downside.<\/p>\n Take the Sydney property market which experienced significant growth (overshooting its fundamentals) during the previous property cycle, and then dwelling values in Sydney dropped 15% from their market peak overshooting on the downside when in general all the fundamentals for Sydney property were sound in 2018 and 2019.<\/p>\n And now Sydney\u2019s property market has grown by close to 30% this year<\/p>\n \u201cCrowd psychology\u201d influences people\u2019s investment decisions, often to their detriment.<\/p>\n Investors tend to be most optimistic near the peak of the cycle, at a time when they should be the most cautious and they\u2019re the most pessimistic when all the doom and gloom is in the media near the bottom of the cycle when there is the least downside.<\/p>\n Market sentiment is one of the key drivers of property cycles and one of the reasons why our markets overreact, overshooting the mark during booms and getting too depressed during slumps.<\/p>\n Remember that each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.<\/p>\n While many people generalise about \u201cthe property market\u201d there are many submarkets around Australia. The fact is, each state is at a different stage of its own property cycle and within each state, the markets are segmented by geography, price points, and type of property.<\/p>\n For example, the top end of the market will perform differently to the new home buyer\u2019s market<\/a> or the investor segment, or the median-priced established property sector.<\/p>\n And while there is an oversupply of poor quality rise off-the-plan apartments in Sydney, Brisbane, and Melbourne, there are more buyers looking for well-located homes than there are good properties on the market in the middle ring suburbs.<\/p>\n Understanding all this information about property cycles is useless unless you own the right assets in the first place.<\/p>\n A grade homes and investment great properties are less likely to fluctuate in value when the property market turns.<\/p>\n If you own the right then it trying to pick cycle timing is nowhere near as important as riding the cycle and holding your assets in the long term.<\/p>\n Remember property investment is a long-term asset in the long-term trend for centuries has been a steady increase in value, despite the short-term fluctuations in ups and downs.<\/p>\n When most Australians hear about \u2018the X-factor\u2019 they think about a talent show on TV.<\/p>\n However, \u2018the X factor\u2019 is also talked about in the less glittery world of economic forecasting.<\/p>\n Economists refer to \u2018the X-factor\u2019 when an unforeseen event or situation blows all their carefully laid forecasts away.<\/strong><\/p>\n More recently Nassim Nicholas Taleb,<\/a> a finance professor, and author popularised the term Black Swan events<\/a> for these deviations from the expected. I first came across this concept many years ago when distinguished economics commentator, Dr. Don Stammer<\/a>, used to try and predict the X Factor for the forthcoming year in the January edition of the now-defunct BRW magazine.<\/p>\n Of course, by definition the X factor is unforeseen, so you can\u2019t really predict it.<\/p>\n But it was a little game he used to play and then review his prophecy 12 months later.<\/p>\n And it is a game I also took up many years ago and have had fun with over the years.<\/p>\n These X-factors can be negative (the aftermath of the Global Financial Crisis of 2008) or positive (the China-driven resources boom of 2010-12) and it can be local or from abroad (the US subprime mortgage crisis of 2008.)<\/p>\n The big X factor for 2020 was the Coronavirus lockdowns<\/p>\n The Delta strain of the Coronavirus was the X factor for 2021<\/strong>.<\/p>\n If you think about it, at the beginning of this year we thought we had this coronavirus thing licked and everything was going to be under control and life would be back to normal. Then look what happened!<\/p>\n These X factors affect the economy at large, which of course affects our property markets, but our property markets also have their own specific X factors \u2013 unforeseen events that affect the best-laid plans and predictions like APRA<\/a>\u2019s unprecedented restriction of bank lending to investors.<\/p>\n So the lesson is while it\u2019s important to take a long-term view of the economy and our property markets, you also need to allow for uncertainty and surprises by only holding first-class assets diversified over a number of property markets and having patience.<\/p>\n Trying to predict the X-factor is futile: if it\u2019s been predicted, it\u2019s not the X-factor, but let\u2019s have a look at a list of major past X-Factors<\/a>\u00a0 (many of these are the thoughts of\u00a0 Dr. Stammer, who now writes for The Australian<\/a>.)<\/a><\/p>\n In 2019<\/strong> was the \u201cmiracle\u201d election win of the Morrison government. <\/strong>Leading up to the election many commentators were forecasting a prolonged property slump assuming the Labor Party would win the Australian federal election.<\/p>\n 2017 \u2013<\/strong> Donald Trump assumed office as 45th President of the United States, while back home APRA<\/a>\u2019s macro-prudential controls brought a halt to the rising Sydney and Melbourne property markets.<\/p>\n 2016 <\/strong>Despite many commentators predicting rising rates, Australian interest rates kept falling, prolonging the property cycle and allowing property prices to surge in Sydney and Melbourne<\/p>\n 2015 <\/strong>Negative interest rates in Europe 2014<\/strong> Collapse in oil prices during severe tensions in middle east<\/p>\n 2013<\/strong> Confusion on US central bank \u201ctaper\u201d of bond purchases<\/p>\n 2012 <\/strong>The extent of investors\u2019 hunt for yield<\/p>\n 2011<\/strong>\u00a0Continuing problems with European government debt<\/p>\n 2010<\/strong>\u00a0European government debt crisis begins<\/p>\n 2009<\/strong>\u00a0The resilience of our economy despite the GFC<\/p>\n 2008<\/strong>\u00a0The near-meltdown in banking systems<\/p>\n 2006<\/strong>\u00a0Big changes to superannuation<\/p>\n 2004<\/strong>\u00a0Sustained hike in oil prices<\/p>\n 2001<\/strong>\u00a0September 11 terrorist attacks<\/p>\n 1997<\/strong>\u00a0Asian financial crisis\u00a0 1991<\/strong>\u00a0Sustainable collapse of inflation<\/p>\n 1990<\/strong>\u00a0Iraq invasion of Kuwait<\/p>\n 1989<\/strong>\u00a0Collapse of communism<\/p>\n 1988<\/strong>\u00a0Boom in world economy despite Black Monday<\/p>\n 1987<\/strong>\u00a0Black Monday collapse in shares<\/p>\n 1986<\/strong>\u00a0\u201cBanana Republic\u201d comment by Paul Keating<\/p>\n 1985<\/strong>\u00a0Collapse of $A after MX missile crisis<\/p>\n 1983<\/strong> Free float of the Australian dollar<\/p>\n Now it\u2019s your turn to play the game and predict the coming year\u2019s X-Factor.<\/p>\n Recently ANZ has updated its property forecasts for the next 2 years<\/p>\n In its latest update, ANZ stated house price growth will slow over the next year to 6% after median house prices boomed 21.9% over the year to September.<\/p>\n The bank suggested that rising house prices will deter some home buyers, while APRA<\/a>\u2019s decision to ensure new borrowers can service a mortgage if interest rates jump 3% will put a brake on lending.<\/p>\n While I generally concur with ANZ\u2019s forecast for 2022, I can\u2019t see a good reason for house prices to fall in 2023 unless APRA<\/a> intervenes and tightens the availability of credit.<\/p>\n Sure housing market growth will slow \u2013\u00a0 the current levels of growth are unsustainable in the long term \u2013 but our improving economy and the opening of our international borders next year will underpin demand for housing.<\/p>\n ALSO READ: <\/span><\/strong>The 7 biggest influencers of our property markets<\/a><\/p>\n![\"Property](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2018\/03\/property-cycle-300x300.jpg\")
<\/p>\n![\"propertycycle\"](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2014\/07\/propertycycle.jpg\"\/ "\\"propertycycle\\"")
<\/div>\nWhat factors influence the property cycle?<\/span><\/h2>\n
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When money is cheaper (interest rates are low) this is positive for property markets. Clearly, the availability of finance (or lack of it) has been a\u00a0 major influencer over the last few years<\/li>\nSo how do we know where we are in the property cycle?<\/span><\/h2>\n
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Learn from the past<\/h4>\n<\/li>\n<\/ol>\n
2. Don\u2019t be fooled by the numbers<\/h4>\n
3. Understand the triggers<\/h4>\n
![\"Fear](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2019\/02\/Fear-of-Missing-Out-fomo-buy-300x178.jpg\")
<\/p>\n1. The economy and our property markets move in cycles<\/span><\/h2>\n
![\"property](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2015\/08\/property-time-market-clock-house-cycle-investment-timing-watch-growth-300x200.jpg\")
<\/p>\n2. The market is usually wrong about the stage of the cycle<\/span><\/h2>\n
3. There is not one property market<\/span><\/h2>\n
![\"property](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2016\/09\/28803914_l-300x169.jpg\")
<\/p>\n4. The importance of asset selection.<\/span><\/h2>\n
5. We need to allow for the X factor<\/span><\/h2>\n
![\"Australia](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2015\/08\/economy-australia-state-finance-country-market-300x168.jpg\")
<\/strong><\/p>\n![\"economy](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2015\/09\/economy-property-market-grow-wealth-house-dream-first-home-300x180.jpg\")
<\/strong><\/p>\n![\"economy\"](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2016\/09\/10201624_l-300x300.jpg\")
<\/p>\n![\"globe](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2015\/11\/globe-world-currency-economy-money-travel-300x236.jpg\")
feat<\/p>\nWhat\u2019s the market going to do next?<\/span><\/h2>\n
![\"Anz](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2021\/11\/ANZ-forecasts-938x692.jpeg\")
<\/a><\/p>\n