Understanding the Property Cycle
When it comes to the property industry, there is no such thing as stagnancy. Instead, there is an ongoing cycle wherein property values tend to titillate between exceeding the long-term trend and falling short of it. To make sure you optimise the return on your investment, it pays to understand the four phases of the property cycle.
As the name indicates, this is the stage where property prices soar ahead. Herein, properties often sell for more than their asking price as competition between buyers escalates. While this generally starts off slowly, it often quickly snowballs as investors recognise the potential for bigger property returns, resulting in more and more people wanting to get on board while ‘the picking is ripe’. During this period, builders, developers and existing home owners are privy to flooding the market with new properties, leading to excess supply and consequently paving the way for the next phase to take place…
- The boom phase
As they say – what goes up, must come down. With the influx of investment properties on the market, it’s only inevitable that vacancy rates start to increase, rental returns start to decrease and property prices stop growing. In some cases, property prices will even begin to decline. Buyers who have over-committed themselves during the boom phase may start to pay the price now (literally): during this period, new homeowners often struggle with repayments thanks to a rise in interest rates. As a result, some buyers may find that they have to sell – and at a decreased price.
- The slump phase
After jumping between extremes, there comes a period where things start to calm down. This is kind of like the transition phase – it’s usually a short burst wherein the different economic factors have a chance to catch up with one another, helping the market to stabilise once more.
- The stabilisation phase
Following a ‘cooling-off’ period, things begin to pick up again: vacancy rates start to fall, rent starts to rise and property values increase once more. Naturally, this gives way for new investment opportunities to be seized. In most cases, property values start to increase in the inner suburbs before moving out to the middle-ring suburbs and finally reaching the outer suburbs. At around the halfway point of the upturn phase, property rates are generally quite affordable and returns from investment favourable, thereby creating major market appeal. This of course piques the interest of investors and buyers, triggering the cycle to re-enter the boom phase and start over once more.
- The upturn phase