Understanding the seven year property cycle

You might have heard about the seven to ten year property cycle, but what exactly is it and is it really that important? To help explain what the property cycle actually is and what factors influence it, we have provided detailed explanations below to help give you a greater insight.

What is the seven year property cycle?

The “seven year property cycle” is made up of various phases which include boom, downturn, slump and recovery.

Generally, people refer to the cycle lasting seven years, but this can be longer or shorter depending on which property market you look at. Each city (and suburb) will also have its own property cycle and Sydney has just come out of its boom phase, whilst Brisbane is in the recovery phase, soon to be entering boom.

It is also believed that properties tend to double in value every 7 – 10 years too, but again this all depends on the property you buy and where this is located.

Boom: This is the peak of the cycle and you can expect to experience:

• Vacancy rates increase
• Lower rents
• More buyers than sellers
• Property prices rise and low levels of listings
• Time on the market very low
• High confidence levels
• Shortage of tradespeople
• Lots of dwelling constructions

Downturn: Property market starts to slow down, leading to the following:

• Affordability crisis leading to a fall in property prices
• Oversupply of stock
• Fewer buyers
• Falling construction prices

Slump: Property market is now at the bottom of the cycle:

• Valuations fall
• More sellers than buyers
• Abundance of tradespeople
• No confidence
• Rising vacancy rates
• Little or no dwelling construction
• Affordability and yields improving

Recovery: Property market starting to look optimistic again:

• Rentals start to increase
• Falling or low vacancy rates
• Dwelling construction starting to pick up
• Prices start to rise
• Rising employment

Should you refer to past property cycles when buying property?

Absolutely. Property cycles follow a pattern and people should look back in time at past property cycles to understand how a property cycle really works and relate it to their current situation. Many people tend to buy property at the most expensive time (boom) when in fact they should be concentrating on selling. By buying a property within the slump or recovery phase and holding on to the property for the full cycle at least and sell when prices are high, you are sure to perform well as an investor.

What factors influence the property cycle?

Interest rates are just one of the major factors that affects the property cycle. When interest rates are cut, this will drive the upswing and demand for property will increase due to lower and more affordable mortgage repayments. In contrast, when interest rates go up again, this will slow down property buying and the property cycle will enter the downturn and slump phases. Supply and demand also closely tie together with interest rates.

As well as interest rates having a large impact on the property cycle, unemployment levels and job security will also affect the cycle with less people buying property who are unemployed or in an unstable job. Consumer spending and confidence will also drop which will impact the economy.

Other underlying factors include how likely you will be able to get a loan from a mortgage lender and the amount of money you are able to borrow to fund your property purchase as well as whether there are properties available in the market to suit your needs and requirements.

So, where in the property cycle is Australia currently sitting?

Looking at Australia as a whole, you cannot say there is one property cycle. As mentioned earlier, every city has its own property cycle and are at different stages of their own cycle. Sydney and Melbourne have boomed, with soaring property prices seen especially in Sydney, but both cities are now starting to experience a slow down, whilst Brisbane is in recovery phase, helped by affordable prices and increasing demand for property.

Elsewhere, Perth and Darwin are sitting in the downturn phase after the mining boom, whilst Canberra, Adelaide and Hobart are sitting in a slump phase and these cities could start to move into a gradual recovery.

What will the next 3-5 years bring for Australia?

Currently interest rates are sitting on record lows and it is expected that these interest rates will start to rise which will bring about falls in property prices and increased supply in the market.

Sydney and Melbourne are likely to see moderate gains, but these gains will be nowhere near as high as what both cities experienced in the last few years. All eyes will look to Brisbane as it will become the top city to watch with the highest levels of growth.

Overall, even though it is best to buy property at the bottom of the property cycle and to sell at peak, it is better to buy property as soon as you are able to, rather than wait. If you can afford to buy a property today, then you should, even if prices are high – it is better to be in the market than sit and watch the market.

The other alternative is to look at other cities and buy in a city which is more affordable. Right now, Sydney is expensive and has just come out of boom, so if you are able to buy interstate, such as in Brisbane, then this will make your money work harder for you.