With the most recent property boom but a memory, property investors are grappling with falling values and tightened lending conditions. While current conditions are not ideal for investors, it’s important to understand the property investment cycle before making changes to your portfolio.
Long term property investors will be familiar with the property investment cycle, the four stages of boom, decline, recovery and upturn. It’s a cycle that repeats every 7 to 9 years, in line with the changing forces of housing supply and demand, available lending, interest rates, politics and society.
For experienced investors, the current downturn in the market is an expected part of the ongoing cycle. With an inevitable recovery and upturn ahead, investors who’ve experienced this end of the cycle before know that it’s best to hold tight while the market goes through its motions.
However, for more recent investors, it’s a shock to face falling property prices after entering a rising market. Without fully understanding the property investment cycle, less experienced investors may question the viability of their investments and even consider selling at the bottom of the market.
Before making any decisions on your property portfolio, take the time to understand the four main stages of the property investment cycle. Ensure you make a truly informed decision so you don’t miss out on the opportunities available in the current market.
The Four Stages of the Property Investment Cycle
The boom period, when property markets peak, is characterised by rapidly rising prices and frenzied demand. Booms are usually driven by several factors:
- more investors in the market
- housing demand outstripping supply
- easy lending conditions
- lower interest rates
Booms are further fuelled by investors paying higher prices to secure their place in the market, pushed into action by fear of missing the boat. Construction activity also peaks in this period, as builders and developers try to take advantage of the top of the market.
Downturns occur as a tipping point is reached in supply and demand, coupled with the introduction of regulatory measures to correct the market. Downturns are generally accompanied by:
- property availability outstripping demand
- higher rental vacancies
- less available credit to investors
- higher interest rates
Downturns can see prices fall significantly in certain markets, as demand falls away in the face of tightened credit conditions and rising interest rates. The glut of housing built at the peak of the cycle further fuels this downturn, with more property available than required.
After a period of decline, markets eventually stabilise as supply and demand come back into balance. Regulatory measures start to lift, encouraging investors to look at the property market again. This period of recovery is characterised by:
- more balance between supply and demand
- stable interest rates
- loosening of lending conditions
- renewed interest from investors
The stabilisation part of the cycle represents an opportunity for astute investors to enter the market at the most opportune time, when prices and demand are low. Buying in this phase of the cycle positions the investor well as the market begins to rise.
A period of stabilisation in the market increases consumer and investor confidence, leading to greater activity. As confidence grows, the market begins heating up, seeing prices begin to rise and demand grow. Upturns feature:
- stable interest rates (often leading to a decrease further in the cycle)
- growing demand for property
- favourable lending conditions for investors
- reduction in rental vacancies/rents start to rise
This stage of the cycle is ideal for investors, featuring affordable properties and attractive returns. It’s best to get in early before the market heats up and enters the peak stage of the property investment cycle.
The current period of downturn is unusual as it hasn’t been driven by an increase in interest rates, which continue to remain on hold. With the superheated markets of Sydney and Melbourne experiencing the sharpest declines in value, other capital city and regional markets have so far escaped the brunt of the downturn.
For the moment, short term falls and slower growth are expected in most markets due to weak wage growth, affordability constraints, increased apartment supply and tighter lending conditions. It’s important to note that some restrictions on investment lending (following the findings of the royal commission) have recently been lifted, encouraging investors to return to the market.
What’s Ahead for Property Investors?
There is hope on the horizon as many experts predict the market to stabilise over the coming year, with an upturn expected toward the end of 2020. For astute investors, it’s worth noting that certain conditions are converging now, potentially leading to an upturn sooner than expected.
Data compiled by CommSec; Westpac/Melbourne Institute reveal that the time to buy a dwelling index is approaching a four year high. Meanwhile, the CoreLogic national income price index has reached its peak and is trending down. Together, these indices present an attractive picture for investors looking to take advantage of lower prices and greater affordability in a subdued market.
Instead of reviewing your property portfolio with a view to selling, it could be more beneficial to consider adding to your portfolio to take advantage of these favourable investment opportunities.
To take full advantage of the current opportunities available to property investors, contact Vision Property & Finance. Our property investment experts are ready to guide you in navigating the property investment cycle. Give our Sydney office a call on 02 8354 3000, talk to our Newcastle office on 02 4014 1999 or contact us here.