The Property Cycle Explained

There doesn’t seem to be a week go by without some report saying property is rising or falling, but generally property values follow a cycle.

Property values rise, remain steady or even decline during certain phases of the cycle. Ultimately, the value of property does increase over time.

There are generally agreed four stages in the property cycle although the names may vary slightly.

The Boom Phase

This is the phase when property prices increase at a rapid rate – and there are almost daily reports in the media! It also tends to be the shortest in the cycle. Generally, the phase begins slowly and then quickly increases as investors and homeowners alike recognise that property prices are increasing.

This leads to properties often selling for more than their asking price. Buyers, both home owners, first time buyers and investors continue to compete with each other in the scramble to get the best price, and vendors continue to ask higher prices.

Eventually the market becomes saturated with an excess supply due to builders, developers and sellers trying to make the most of the inflated prices.

The Slump Phase

When there is an excess of property, property prices stop increasing and in some cases, may even decline. At the same time, investors may find vacancy rates are increasing and rental value falling. This is known as the slump phase, and many people talk about the ‘bottom falling out of the property market’ at this time.

This is the time when property buyers can bag a bargain as sadly many people have stretched their finances and are forced to sell, sometimes at a lower rate than when they bought the property.

The Stabilisation Phase

After a slump, generally there is a short phase the market stabilises. Usually this is when various economic factors, such as an increase in business confidence catch up with each other.

The Upturn Phase

Gradually, vacancy rates slowly fall, rents start to rise and property values start to increase creating investment opportunities. This is known as the upturn phase.

Generally, in the upturn phase, you will see property values start increasing in the inner suburbs, or beach side first. The increases then spread to the middle ring and eventually to the outer suburbs.

Property is generally affordable and returns from property investment are good in the middle of an upturn phase. The market attracts interest from investors and first time home buyers. Property prices begin to increase, and so the cycle starts again.

In the Newcastle area including Lake Macquarie, we are lucky and we don’t often see some of the extreme prices experienced in the boom phase in other places such as Sydney. We generally see small but a more consistent market. Where Sydney may see a 20 per cent rise in a year or two, it then has a major correction where the price can also drop by just as much.

Our market meanwhile may see prices go up by single figure amount per annum, (although in 2010, Newcastle’s prices jumped by over 12 per cent), and when we do have a correction it is usually by only a few percent. (Lake Macquarie saw the lowest over the past 15 years at just-2.5 per cent back in 2008 and it quickly made it up the following year by increasing 5.3 per cent).

Needless to say, in our 40 years of business, we have seen a lot of cycles, and we’ve also seen a lot of hollow predictions.

Various factors such as the willingness of mortgage lenders to write new loans, the broader economic outlook and unemployment rates and local infrastructure projects to affect the cycle, but ultimately, only you can decide when it is best to buy.

If you are thinking of investing in property, our knowledgeable and experienced team can talk you through the process and point out what to look for, and give you some indication of current market trends. We are one of Newcastle’s longest established real estate offices. We know the area and we know the market, so give us a call on 02 4954 8833 or pop into our office for a chat.