Hedland & Newman

How long does a property market take to run full cycle?

July 16th, 2014 • 7 comments

A regular question I’m asked is ‘How long does a property market take to run full cycle and how can I pinpoint the bottom of the market?’ My answer generally depends on whether it’s a capital city or regional location as the two can be very different beasts.

Understanding how the two differ and learning how to recognise the various stages in the cycles are key to getting comfortable over when to get in and when to sell.

Falling or flat markets often scare investors away as they give the misconception of poor performance. Rather, informed investors know that this can be an indication that a market is at or may be reaching the bottom of its cycle. Markets showing years of little or no growth can present exciting opportunities to buy in at the bottom of a market cycle and ride the capital and rental growth curve as it trends back upwards.

So, what IS the difference between a capital city cycle and the cycle of a resources city or town?

Regular market movements are commonplace in resource towns and the market cycles and annual fluctuations differ greatly from those seen in capital cities.

The housing market in a resources town can turn a full cycle in as little as two to three years, as it responds to infrastructure and economic development activity in the area. During a down cycle, prices and rents may roll back as much as 25% before the market moves through its cycle and begins its upwards swing.

In contrast, capital cities generally experience a full market cycle every seven to eight years with prices and rents detracting by up to 15% on average.

What this means is, investors have an opportunity to take advantage of the more frequent and pronounced growth cycles in regional areas to generate greater returns more quickly.

How do you know when a market has reached its bottom?

News reports in the media are great at telling us when a market is in steep decline, or when it’s booming. However, pinpointing when a market has reached its lowest point can be very tough as we never know the bottom has been truly reached until the market shows a consistent rise again!

This is where market research comes in. It is critical in determining what the growth drivers are for a particular area and when those drivers are likely to come in to play. Check out my recent blog on how to conduct market due diligence here (which applies to both regional and city areas).

Buying in ahead of a boom always requires some risk-taking. Industrial projects can, and do, falter from time to time which consequently impacts the demand for housing in the area. While the greatest returns in resources towns are often made by those who invest before the large infrastructure projects receive final approvals, investors should exercise caution and consider both the best case and worse case return scenarios. Get the timing right though, and you have truly led the pack and uncovered the next boom market ahead of the rest!

Capital cities also experience up and down swings but they are more gradual and less pronounced due to their population size and industry diversification. And while, as a whole, capital cities will experience a broad cycle, suburbs within it can behave differently to the broader market trend.

This means that while the city as a whole may be trending down, you will still find certain suburbs within it weathering the storm. This makes research into capital city suburbs just as important as regional towns.

When should you sell?

Each and every investor’s personal situation is different and the answer to this will depend heavily on your personal circumstances and financial goals.

While it’s true that many investors see resource towns as short term capital growth investments – getting in before the upswing and getting out before the downswing – these are fundamentally positive cash flow markets which provide ongoing opportunities for cash flow and capital growth over the long term.

When taking a long to medium term view of investing it’s important to ensure you’re financially positioned to ride out the downturns during periods when rents and equity drop.

The advantage of positively geared markets however is that yields can typically remain high enough to cover the property’s holding costs during down cycles which can help insulate investors portfolios and repayment ability.

Rather than focus on trying to pick the exact bottom of a marketplace before committing, I suggest doing your research and identifying a location with sound dynamics and growth prospects – if the market has performed well in the past, been through a decline and levelled out in recent years, chances are it may be poised for a recovery.

 

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Questions

We have two properties bought from Crawfords – one in Newman and one in Karratha. The Karratha property will be vacated on 6th August and there has been no interest yet. It is being advertised at $1300 pw – the return was $2050 pw when we bought the property in February.
The second property is in the Fairways at Newman, leases ar $1400 pw when we bought it last year, dropped to $900 pw just after we bought it with the lease due for renewal in September.
This is much worse than the worst case scenario we factored into our due diligence.

We are facing losses of $2700 pw with a huge mortgage to pay.

Any comments??? We are desperate for an upswing

Comment by Helen and Terry Williams on July 20, 2014 at 7:22 am

Hi Ryan,
My husband and I have bought 2 invesments in Newman. They are 4 by 2 being dual properties.
Which means in a good market we would potentially be receiving two income streams at the same time. As you maybe aware ate the moment Newman has hit rock bottom and nothing seems to be renting. I know that this maybe the worse market in along time and like you mentioned previously mining towns are cyclic. We are trying to prepare ourselves for the worst case scenario financially and have spoken to our accountant this would be negative geared properties but because at the time we bought them the market was on a high so our accountant has set them up in a Trust accountant. Unfortunately market being down we cannot claim the negative gearing. Do you think Newman will be down for another year before it picks up again? I know that Roy Hill will be operational next year? When do you think the rental market in Newman may start picking up again? Your feedback much appreciated.
Regards Peter

Comment by Peter on July 25, 2014 at 4:18 am

Hi Peter,

I do think Newman will be down for another year at least – the market is around nine months in to its downward trend so this will continue for some time before we should see it pick up again. Market sentiment is particularly poor at the moment following reports of job losses at BHP. The effect of this from our perspective however has been relatively positive. Our Newman office has reported an increase in leasing enquiries as employees affected by the redundancies and housed under corporate leases seek alternate rental accommodation in the town. This may help to absorb some of the rental oversupply.

I believe the medium to long term outlook is positive for Newman. There is significant civil infrastructure and town revitalisation projects underway as the government pushes to increase the population to 15,000. Roy Hill and robust exploration activity will help drive further economic growth.

Comment by Ryan Crawford on July 30, 2014 at 7:18 pm

Dear Ryan

My Partner and Myself have bought a 4 Bedroom , 2 Bathroom in East of Newman in 2012 at its Peak . After discussions held with Crawford Property Group Management @ the Newman Branch , it seemed no one had any idea of such a downswing occuring in the near future. But was is most frustrating , is our rental yeild per year has dropped from 182k to 30k has amounted to a severe increase in our stress levels , as we are now being informed that we bought in the wrong pocket or wrong section to Newman which makes it hard to find tennants. Could u provide us any information to remain on this Investment that has caused enourmous amount of stress

Comment by Zafer Salih on April 12, 2015 at 1:13 pm

Dear Ryan

My Partner and Myself have bought a 4 Bedroom , 2 Bathroom in East of Newman in 2012 at its Peak . After discussions held with Crawford Property Group Management @ the Newman Branch , it seemed no one had any idea of such a downswing occuring in the near future. But was is most frustrating , is our rental yeild per year has dropped from 182k to 30k has amounted to a severe increase in our stress levels , as we are now being informed that we bought in the wrong pocket or wrong section to Newman which makes it hard to find tennants. Could u provide us any information to remain on this Investment that has caused enormous amount of stress

Comment by Zafer Salih on April 12, 2015 at 1:13 pm

Hi Ryan
Do you think property prices have reached rock bottom in port hedland?

Comment by Daniel Venn on April 20, 2016 at 6:23 pm

Hi Ryan,
Could you kindly give me your opinion on where we are at on the property cycle in regards to Hedland?

Thank you,
J MacDonald

Comment by Jeffrey MacDonald on June 18, 2016 at 3:49 pm