The property cycle is divided into 4 phases
The property cycle is a recurring pattern of upturns and downturns in the market for housing influenced by economic, political, social and psychological factors.
Periods of growth are inevitably followed by periods of reduced growth and market ‘corrections’.
While property cycles can vary in length, pace and the height of the peaks and the depths of the troughs, they follow the same long term positive trajectory. Variations around the trend line are to be expected, but it is the overall direction of the trend that is important.
This is why a property is not considered a short term investment or a ‘get rich quick scheme.’
It is worthwhile noting too that while recovery periods typically match the length of time, it takes to go from peak to trough, it is not always the case.
Investors need to commit to sustainable levels of debt that will allow them to ride out the downturns.
Investment in real estate like any other asset class is subject to market sentiment and the performance and management of the economy as a whole. Returns may fluctuate depending on factors such as supply and demand for housing, population growth, interest rate changes by the RBA and government incentives and exogenous shocks to the economy.
Influences on the demand side include:
The business cycle – if the economy is growing, unemployment is low, and consumer confidence is high, as incomes rise more people buy their own homes and more people are in a position to invest. If the economy is slowing and unemployment or underemployment is growing, and consumers are pessimistic about the future they will hold off and wait for conditions to improve, leading to a decline in demand.
Government incentives through fiscal measures encourage owner-occupiers and investors via grants and stamp duty concessions, negative gearing allowances and capital gains tax discounts. Removal of the same inducements will have a reverse effect. Political uncertainty and imminent elections also inhibit consumer confidence.
The RBA’s manipulation of the cash rate influences the cost and availability of credit in the economy, and more people are likely to borrow and purchase property either for owner occupier or investment purposes when rates are eased and less so when the policy is tightened.
Prudential regulators such as the Australian Prudential Regulation Authority (APRA) can encourage or discourage borrowing by relaxing or toughening the guidelines for financial institution’s lending criteria.
Demographic trends such as population growth and the divorce rate will increase or decrease the demand for housing (and the type of housing)
Media coverage intensifies consumer perceptions and ‘fear of missing out’, and it can also drive ‘doom and gloom’. Consumer confidence and emotion govern many decisions.
Influences on the supply side include:
The availability and cost of development sites and materials: vendors will assess the profitability of entering the market as a supplier and calculate the risk and return potential. If they expect costs to increase, they will seek a higher margin as insurance against future erosion of profits.
Bureaucratic red tape and compliance costs influence the profitability of ventures, including the approval process and mandatory infrastructure co-contributions
The cost and availability of finance for developers. If credit is limited and difficult to obtain, a smaller number of projects will get off the ground, typically by more substantial, corporate developers.
Builder expectations, confidence and perceptions of buyer demand influence their willingness to take risks and enter the market.
The property cycle is divided into 4 phases: