How long does a property market take to run full cycle?
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.
What low interest rates mean for positive property investors
In December, the Reserve Bank of Australia cut interest rates to 3 per cent following the fall in the iron ore price. It marked the fourth interest rate cut in less than a year and equals the lowest level ever set by the bank in 2009 at the height of the GFC.
The RBA said in a statement last week that while low rates have had some positive effects on the housing market – increases in building approvals, higher rental yields and improving house prices – economic growth as a whole is still below trend. It indicated that rates are likely to remain low for a while and could even drop a little further.
This is good news for positive property investors.
Interest rates have a big impact on whether a property is positively geared or not. A low interest rate results in lower interest payments. If the interest payments become less than the rental income, a negative or neutral property can become positive (assuming the rent also covers other costs associated with owning the property).
This means low rates can open up more market opportunities for positive gearing. Investors also have the other current advantage of high rents, so with thorough research you will find properties that will generate a decent passive income.
For those already invested in a positively geared property on a variable interest loan, you will be enjoying the benefits of lower interest payments and increased profit.
Unfortunately though, low interest rates will not stay low forever. Investors should take this into consideration when making an investment to ensure they can afford a drop in income when rates begin to rise again. Taking out a fixed rate loan will reduce this risk.
Low rates and high rents may also mean it becomes cheaper to buy than to rent in some areas, creating an owner occupier market and reducing demand for rentals. However, with the ongoing housing shortage in Australia and rental market going strong, any increase in homebuyers is unlikely to have a significant effect on the rental market in most areas.