Typically, property values rise over time, but that does not mean that they are exempt from periodic peaks and valleys, known as the property cycle. As a property investor, you need to be aware of which stage of the cycle the property market is currently in so that you can make smart investment decisions. Here's what you need to know...
How does the property cycle work?
Most of us understand that property prices are probably as far as you can get from a fixed-cost commodity. It’s easier to make a profit if you buy when property is cheap, hold onto it and sell when it’s in high demand. Yet with so many factors determining how property prices rise and fall, how does the property cycle work and how can it help affect your property investment strategy?
There are five stages to the property cycle that may help you make a more informed decision.
- The bottom of the cycle - In this stage, the property market has just begun its recovery from a period of stagnation or falling home prices. Prices are at their lowest, and banks are more conservative in choosing who they are willing to lend to. This is a good time for investors to consider getting into the property market, thanks to the lower prices. However, those without ideal credit may find it challenging to find financing. Those who already own property would do best to hang on to it and wait for prices to go back up.
- The rising phase - At this point, the market has recovered from the recent slow period, and home prices are beginning to rise again. As more buyers enter the market, banks tend to loosen up on their lending restrictions, making this an optimal time to buy. Although prices are starting to rise, they are still relatively low.
- The boom phase - In this phase, home prices are rising rapidly, leading more sellers to put their properties on the market. Interest rates tend to drop during this phase as banks compete with each other for customers' business. If you currently own property, this would be the time to sell, as it gives you the chance to make the greatest profit. New property investors would be advised not to buy during this period, as the high prices will make it difficult to make a profit later.
- The slowing phase - This stage represents the peak of the market. After the recent rapid rise in home prices, the property market starts to level off as supply and demand balance each other out. Although prices are still fairly high, this is not a great time to sell, as too many properties are already on the market.
- The falling phase - This phase is where the market self-corrects to bring itself back into balance. Home prices sometimes remain stagnant and sometimes fall. Investors who are watching the market closely should start doing research during this period because the cycle is preparing to start over.
Why location matters
Different neighbourhoods are often at different stages of the property cycle. For example, 2015 was a time of rapidly rising home prices in Auckland. However, the surrounding areas had not yet seen that rise. It is likely that there will be somewhat of a ripple effect, with Auckland's suburbs experiencing price rises going forward as Auckland's property market begins to contract.
When evaluating areas for their stage in the property cycle, it is important to be aware that they will not always be in the same phase as their close neighbours. Intelligent investors will track multiple areas simultaneously so that they can evaluate larger trends.
For inexperienced property investors, it can be difficult to ascertain the current property cycle phase of a particular area. Local real estate agents should have the expertise and familiarity with the local market to offer sound advice as to when would be the best time for you to invest. Over time, it is possible to learn to monitor the property cycle for yourself, but a qualified real estate agent can provide invaluable advice to help you get started.
Looking for help on your property journey? Download our free guide to help you navigate the highs and lows of property investing.
