There are many stories of investors selling their property too soon, before a period of substantial growth. Too often that story finishes with comments such as “I shouldn’t have listened to my accountant…parents…godmother!”. Amongst all those “could have’s”, “should have’s” and “would have’s”, are those investors who managed to get it right.
There are two main explanations for “getting it right” - knowledge and understanding of the fundamentals that drive the Property Cycle, and sheer luck. At Meridian, we prefer to take an analytical approach; making an informed decision based on sound due diligence, as opposed to speculating on market sentiment.
Nearly all commodities are subject to cyclical fluctuations, and real-estate is no different. Most investors today have heard people speak about Australian capital cities doubling every 7-10 years. Actually, Property Cycles can take as little as 5 years, or as long as 15 to move from peak to peak, and the time period and extent of growth of these phases varies from one state to another.
Meridian divides The Property Cycle into five phases: Value Phase; Growth Phase: Danger Phase: Correction Phase: and Opportunity Phase (diagram below):
In order to purchase a well-priced property at the right time, an investor must know how to identify which phase of the Property Cycle that a market is experiencing at the time of purchase.
The Value Phase
Following a period of stagnation and minimal construction, the market is relatively affordable and experiencing an undersupply. Australians will jump at the chance of a well-priced property in a desirable market, therefore demand is high. Consequently, prices experience a slight uptick. Make no mistake, builders are aware of this excess demand, and begin building as soon as possible. However, this construction may take up to 5 years to complete. With high demand and low supply, this is an ideal time to invest in a market.
The Growth Phase
In the growth phase, construction begins to enter the market, nevertheless, prices are still increasing at a rapid rate because demand for property outweighs supply. Nearing the conclusion of this phase, the media tends to label these markets as “hotspots”. Accordingly, there is an influx of buyers seeking capital gain, pushing property prices to unsustainable levels and tightening affordability. Over time, prices finally reach a peak as construction levels meets current demand for property.
The Danger Phase
Appropriately named, because this is worst time to invest. The excessive building during the Growth Phase causes the market to tip into oversupply. Moreover, after the market experiences exceptional growth, affordability deteriorates. House prices are out of reach for the local population causing a reduction in demand. To put simply, with high supply and low demand, prices are not pressured to increase.
The Correction Phase
From now on, house prices will experience a correctional period where values either plateau, fluctuate or decline. Likewise, construction slows down as builders are aware the market is experiencing a correction. With weak affordability and an oversupplied market, both buyer and building activity is minimal.
Throughout this period incomes gradually increase while house prices remain stagnant, improving affordability. Simultaneously, with no new supply entering the market, and the current oversupply naturally being absorbed, the market is transitioning into undersupply.
The Opportunity Phase
In the opportunity Phase, the market is in heavy undersupply caused by a lack of construction through the correction phase. Furthermore, there is an increase in demand as affordability strengthens. The opportunity phase is classified as the bottom of the market, and is the smartest period to invest, as buyers can capitalise on any price increase.
Investors do not need a crystal ball to predict the Australian property market. Ultimately, it comes down to education and knowledge. Learning to identify and take advantage of the phases in the cycle is a crucial factor when it comes to generating wealth from property. The saying goes, “buy straw hats in winter, and sell them in summer”.