How to identify a property market peak

The Australian property market goes through cycles, much like any other investment. Studious investors look to get in at the trough, or the bottom of the market, and exit out when the market is at its peak.

You may have also heard this being referred to as the “property clock”. Recently, the Australian Property Institute plotted Sydney, Melbourne and Brisbane onto the clock and predicted their movements around the cycle for the next three years.

But how does one attempt to determine these market movements on their own?

Picking the exact top of the market is a much easier exercise in hindsight. However, there are some indicators that can assist you to determine when a peak is coming or when, perhaps, an upswing is likely to occur. This can be done for smaller markets where possible as well.

Interestingly, while these guidelines often hold true, it’s worth remembering that not every factor has to be in concert with the other to mark a downswing or a peak. For instance, interest rates, at present, may be out of sync with what is usually expected of the market.

The majority of the factors below can be easily determined by anyone keen to know about the property market – either through the Australian Bureau of Statistics’ housing finance figures and dwelling approvals, the Reserve Bank’s (RBA) interest rate announcements, stock on market figures through SQM Research or through RP Data’s median house prices and rental statistics. Sentiment surveys and affordability indexes will also be useful.

Here are the characterising factors of each part of the cycle:

DOWNSWING

1. Falling demand
   
   
2. Rising vacancies
   
   
3. Falling building approvals
   
   
4. Increasing supply and declining loan approvals
   
   
5. Declining rental rates and property prices as demand soaks up excess supply

BOTTOM/MARKET TROUGH

1. Negative market sentiment
   
   
2. Over anxious sellers
   
   
3. Falling prices
   
   
4. Falling interest rates
   
   
5. Stagnant building activity
   
   
6. Yield-seeking investors emerge
   
   
7. Fundamentals begin looking attractive

UPSWING

1. Increasing numbers of mortgages
   
   
2. Reasonable affordability rates
   
   
3. Increasing demand as excess supply is absorbed
   
   
4. Rising building approvals

PEAK

1. High investor activity
   
   
2. Rising interest rates
   
   
3. Rising loan and building approvals
   
   
4. High demand but limited supply of properties
   
   
5. Decreasing affordability

Source: Ron Bennetts and Gavin Hegney, The Australian Residential Property Market