When to invest in property? Understanding the market cycle

Property, just like any other investment class, generally follows a cycle where prices rise and fall followed by a recovery. By nature, property is a long-term investment, so tracking these cycles can pay dividends in the long run. 

An often heard property investment mantra is that Australian property values double every decade, especially across the capital cities. But is this really the case?

CoreLogic's senior researcher Cameron Kusher put this theory to the test in a blog earlier this year, analysing home values in the 10 years to 2016 and the 10 years preceding that.  

“Over the 10 years to January 2016, home values across the combined capital cities have increased by a total 72%,” wrote Kusher, which is well short of the doubling theory. Melbourne was the only capital city housing market in which home values doubled over the past decade.  

In contrast, between January 1996 and January 2006 combined capital city home values rose by 151.7%, more than double the latest figures.

The data is a good example of the property growth cycle, and that despite common belief, growth is not guaranteed or consistent and is tied to economic factors.

Property cycle at a micro level

LJ Hooker’s national research manager Mathew Tiller says that to get a clear idea of how a market is performing, you need to approach it at a micro level.

"From a national perspective, you could say the real estate market has continual growth," Tiller says. "But, if you look at each individual state and market, than you can see that property fluctuates quite significantly, at different times as well."

The fact is borne out with a comparison between Western Australia and New South Wales. 

Between 2004 and 2008, the mining and resources boom fuelled a rapid growth in WA’s population, around 250,000. More jobs and a low unemployment rate also translated to a rise in property prices. The increase in demand resulted in fierce competition, which pushed the median house price up 93% during this period, according to research by LJ Hooker.

Meanwhile, the NSW property market was experiencing a contraction due to a relatively high unemployment rate, flat population growth and an increase in listings on the market.

"If employment opportunities decrease then demand for housing in those areas can also decrease as the population moves out," says Tiller. 

Fast-forward to 2015, with the mining boom over, Perth's home prices dropped 0.9% over the 12 months to September 2015 while Sydney's dwelling values skyrocketed 16.7%. 

The ups and downs can be explained through the classic economic theory of supply and demand, says Tiller.

"If demand (the number of buyers) exceeds supply (the number of listings), prices will rise, whether that's in terms of house sales or rent prices," he says. "If new supply comes into the market and exceeds demand then prices will fall."

When to invest

CoreLogic RP Data’s Pain and Gain report found that homes that resold at a profit over the June 2015 quarter were held on average 9.9 years. 

Approaching property as a long-term investment logically means that buying at the bottom increases the chances of maximising profit from property.

How to pick the best time to make a shrewd investment is another matter. Tiller recommends doing your research thoroughly and speaking with your local real estate agents to find out about where the area sits in the property cycle.

"There are a number of sources available where you can view the property charts and where the median price of a suburb or an area sits in relation to where it was 12 months ago or two years ago," he says.

Knowing where your area is in the property cycle is one of the keys to a successful investment.