What is the Property Market Cycle?

Here on the Northern Beaches homeownership is a high priority, we locals love and are invested in all things property such as purchasing, renovating, building, and decorating… Therefore it’s no wonder the most frequent question I get asked is “What is the property market doing and what is the property market cycle?”.

While I can answer confidently about the current mood on the ground, there is also a larger reality at work, sometimes referred to as the property market cycle.

With so much interest, I thought it would be useful to present an overview of how the market cycle operates and the key elements that influence it with the intention of bringing perspective and helping us grasp our current position.

What is the property market cycle?

Property prices change over time, and though Australia’s property markets have risen over the long term, they don’t tend to increase at the same rate year after year. Historically, these markets follow a pattern that starts with a phase of rising home values, followed by a lull where prices stagnate, or even fall, before they uptick again. This repeating pattern of highs and lows is referred to as the property market cycle. Cycles are ongoing and operate on both a macro and micro level, varying from state to state and region to region.

Real estate experts in Australia usually explain the cycle in four distinct phases: the boom, the downturn (or slump), the stabilisation, and the upturn. The length of each cycle varies but is often said to turnover every eight to ten years, generally starting with a short sharp boom in prices and then a slump and a longer period of stagnation before the cycle gains momentum and starts upwards again. The duration of a particular cycle is not precise or entirely predictable but instead depends on a combination of economic factors plus supply and demand.

This graph illustrates the nature of the property market cycle in Australia and how the duration of each cycle has varied over the past 18 years:

The Boom: What is it and what drives it?

The boom is usually the shortest and most accelerated phase in the cycle. When the market is booming, property values increase rapidly and in some cases by huge margins. Supply and demand plays a big part in this phase, when low stock is paired with plenty of buyers, demand quickly starts to outstrip supply. In a boom the mood quickly changes, demand creates competition, competition creates buyer FOMO and prices push upwards in a hyper spiral. In 2021 we saw this happening with prices rising nationally by almost 30% and locally by an astronomical 60% in some local suburbs such as Newport and Avalon Beach.

Another term for a boom is a seller’s market, due to seller’s such as  developers, investors, and homeowners are extremely motivated to sell, incentivised by heightened competition among buyers. Often sellers expectations in this period are exceeded with far higher prices and faster turnarounds achieved than at any other time. Eventually, as more stock becomes available it can balance the demand moving the cycle into the next phase.

Interest rates and access to credit also influence the boom period. When money becomes cheap to borrow and loans easily accessible, buyers have more money to negotiate with, which consequently drives bidding wars, pushing prices up. We saw this with the unprecedented low interest rates the pandemic period provoked.

The downturn: What is it and what drives it?

Following the boom we usually see a downturn otherwise known as a correction, or a cooling. Oversupply is a primary driver of this next phase, as well as other economic factors such as inflation, interest rate hikes, consumer confidence, and stricter lending policies. Key indicators of a downward turning market are; properties taking longer to sell, sale price results less inflated, selling on or under the guide price and auction clearance rates low. Experts say that in property cycles the more extreme the boom is, the longer and deeper the downturn usually is, however, over the long term we know that in Australia property cycles circle upward, meaning if you hold property long term prices always rise, even if they fluctuate up and down in the short term.

Australia is currently experiencing a downturn, with property prices falling by -1.6% in August 2022, according to the latest CoreLogic research.

The present trend, which started early this year, is being influenced by interest rate rises, access to credit tightening and the inflated cost-of-living.

The stabilisation: what it is and what drives it?

Downturns don’t last forever, eventually key influencing factors start to ease, for example interest rates decrease again, consumer confidence grows and the wider economy moves towards a growth phase. There is however not usually an immediate switch from a downturn to an upturn but rather a period of stability with supply and demand roughly in balance with buyers gradually and cautiously testing the waters and transacting in a measured way.

This phase is the most lengthy in the cycle, and property prices usually remain flat or increase slowly and marginally. In this more balanced market, it’s possible to make moves with less risk and therefore less anxiety. It can also be an opportune time for property investors who can capitalise on buying well before the next upswing in the cycle.

The upturn: what it is and what drives it

Now we return to an upturn phase, where momentum picks up, the cycle takes an upwards trajectory en route to an impending boom phase. The mood in the market heats up as property values start to rise steadily, buyers sense a bull market coming and they are motivated to move swiftly, intensifying demand and driving the market forward, especially in more exclusive locations.

When we are in an upturn phase I often experience a rise in activity from developers and builders who see potential in a coming boom, then towards the end of this phase, demand really starts to kick in, outnumbering supply and property prices subsequently rise rapidly.

What should we expect now?

Understanding where we are in a cycle can help you decide whether or not to buy or sell property, depending on whether you think values are likely to grow, stagnate, or fall. In my spring market update I analysed the data from the previous quarter, which indicates we have been in a downturn as property values fell nationally. Some experts are saying that we have already ‘hit the bottom’ as the data we are analysing today is lagging, recorded from properties settled over six weeks ago.

As we hit the summer season and travel into 2023 it will be interesting to see how the wider economic climate fares, how far interest rates rise and at what level consumer confidence is in the new year. As macro trends like these stabilise, it is likely that our property markets will follow. It’s also important to remember that the falls we are experiencing at the moment are still small compared to the historic property price growth of the past two years. However the market moves in the near future, we know that the property market is cyclical in nature, and this current lull will inevitably be followed by a period of buoyancy, especially here on the Northern Beaches where demand is always high.

If you are looking to sell in the Northern Beaches and would like selling or buying advice you can contact me on 0424 053 355 or email.

If you’d like to track the value of your home, compare recent sales and find out how much your property is worth in the current market, you can get your free estimate here.