What every property investor must understand when playing the investment game.

Property Clock & Property Market Cycles

The property market is cyclical & goes through peaks and troughs over a period of time in direct response to variable economic conditions & customer sentiments & confidence. It starts when the market has matured, then declines and bottoms out. Eventually when the customer confidence gains speed due to various factors after the period of decline, the cycle starts again. When you are considering purchasing an investment property, especially if you would like to develop you own investment properties, further down the track, it is imperative to consider where does the property market sit at the time. You might get caught if you end up buying at the wrong time.

For instance, media goes abuzz with hot spots & property magazines are constantly reporting on success stories of a select few, who are making a killing with their investment property in capital growth, rental yields & manufactured growth in certain hot spots that you are most definitely missing out on. If you at that time decide that you better get in the property market; you have made the wrong decision from the onset. Always remember, if the news of great investment properties hits prime time news or Current Affair or Today Tonight, you are already late. If you buy your investment property at that time, you are the one paying for the capital growth of the ones in the success stories. It is imperative to understand the property cycle so you fully understand the signals & gauge the correct time to invest in property and or property development.

Most beginner investors believe the risk is the lowest when the property market is booming and the highest when no one is buying and the prices are low. Where as the reality is the exact opposite of this type of linear thinking. Historical data shows that it is more likely for prices to rebound when they are really low.

Phase 1 – Maturity

As a market matures the gap between the demand and supply closes and the market starts to flatten out as prices stabilize. Not a good time for investment, why? Because this is the time, when if you purchase an investment property, you will be paying for the capital growth of the ones who are in the media making a killing with their investment properties. This period is marked by:

• Shorter “Days on the Market” – i.e. properties sell quickly.
• Developments that were being completed arrive on the market, hence closing the gap between supply & demand.
• Investors confidence is high
• Businesses thrive
• Building Approvals increase
• Employment improves

Phase 2 – Decline

As the gap between the supply & demand of property closes, the property market becomes over supplied and demand falls, which prompts vendors to offer discounts & special offers. Some typical characteristics are:

• Increase in unemployment
• Repossessions & Liquidations
• Businesses default
• Discounted rents and sale price concessions
• Interest rates increase
• Oversupply of new developments
• Days on the market increase – i.e. properties now take longer to sell

Phase 3 – Market is bottoming out – this is where our market was for the last two years.

• Very little developments take place
• Investors show patience & play a waiting game
• There are bargains to be grabbed in the market
• Price concessions stabilize
• Little activity in the market
• Banks tighten the finance

Phase 4 - Growth

This phase a market by a growing economy, expanding businesses, new developments & increase in prices i.e. increase in demand

• Number of Building approvals increase
• Excess supply is consumed and demand for new developments increase
• Interest rates fall
• New buyer become active

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Amber Khanna
Finance & Mortgage Broker | Property Developer | Entrepreneur

Amber recently authored a course for property investors and developers which walks them through the process of "Finding your next Investment Property or Property Development deal - the smarter way". This one of a kind course, walks you through the step by step process of conducting property research & due diligence before settling on your property.

If you are starting out in property investment or property development, check out Amber's blog on property development and property investment strategies.

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