What sort of cycle does the Australian property market experience?
Looking to buy a property can be a stressful task, and it's always going to result in a significant outlay. It's the most expensive purchase you're ever likely to make, unless you decide to invest in a 100-foot super yacht and sail the world. Even then, you probably wouldn't own a house because your boat would be much nicer!
Nevertheless, finding the best time to buy a home is important, no matter what sort of buyer you are, or how much you have to spend. That's where understanding the property cycles comes in handy. You don't have to memorise exactly what goes on in the market at every stage of the year, because a professional buyer's agent has already done that work for you. Simply take on the services of one and sit back while they do the legwork for you.
Choosing when to employ a buyer's agent can alter based on the market, though. For example, when there is high demand and low supply, as the market is showing now, dwelling values are being driven higher. In a market with low demand and high supply, there will be plenty of available homes and hardly anyone looking to buy, allowing prices to fall. That's a situation Australia is unlikely to find itself in for quite some time.
It's commonly thought that the property market goes through a cycle of peaks and troughs.
It's commonly thought that the property market goes through a seven-year cycle of troughs and peaks, where prices rise and fall, and supply follows a similar trend. Nobody wants to buy when a price drop is just around the corner, but at the same time, sellers won't want to be listing their homes right before a fall because they won't be capitalising as much as possible.
At the same time, sellers would prefer to list just before a spike is expected, but buyers won't be searching at these points because they'll have to pay through the nose.
Finding a balance between these points for both buyers and sellers is difficult, but it does happen. Choosing the right time to buy also depends on how long you want the search to take, what your price ceiling is and how much competition you're comfortable facing.
So, what's at the heart of these property cycles?
Is there a seven-year turnaround?
According to the CoreLogic RP Data monthly indices, the median dwelling value in Melbourne currently sits at $797,150. At the same time last year, that figure was down by 13.9 per cent. Taking houses only into account, the median value for these was a whopping 14.61 per cent lower 12 months ago than the $845,650 of June 2016, and apartments now sit at $525,800, which is 7.89 per cent up.
However, that's only an increase over one year – not seven. According to the Reserve Bank of Australia's (RBA) report on Long-run Trends in Housing Price Growth, the price of housing around the country has increased an average of 7.25 per cent every year for the past 30 years, which is above the expected rise that inflation brings with it – inflation only increased 7 per cent each year. Furthermore, the most notable cyclical factor that alters the growth of house prices is monetary policy. For example, mortgage rates were reduced in 2011, which pushed more people into the buying market to take advantage of the conditions, but that has also led to more price growth that the construction of new dwellings can't keep up with.
To put the above Melbourne figures into perspective, the aggregate median dwelling value of the five major capital cities in Australia increased by just 10.15 per cent over the last 12 months to $755,500. Looking at houses, where Melbourne grew by 14.61 per cent, the aggregate value was only 10.07 per cent, and apartments in Melbourne rose by 7.89 per cent, but over the rest of the country it was 10.68 per cent. That last figure is a little out of proportion; however, as the Sydney increase in apartment values was 15.48 per cent as a retaliation to the extreme cost of a house in the city, and Perth's drop of 4.58 per cent, which is being seen as a result of the end of the mining boom in Western Australia.
What the seven-year cycle is really referring to, then, is not a peak and trough of expensive and cheap housing, but more regarding the way the price growth rises and falls. It's rare for the median price of housing in a city to fall rapidly, thus making property more affordable, because as soon as this starts happening, people will be more reluctant to list their homes, and buyers will be out in force trying to snag a bargain. With high demand and low supply, prices will just be pushed higher once more.
What the seven-year cycle is really referring to is the way the price growth rises and falls.
Therefore, it makes more sense to look at house price growth as the subject of this seven-year cycle. The actual cost of homes won't be dropping in a trough, in this case, but the amount the value of a home has grown over a period of time would be lower than in a peak. What that means is that a home might have increased in price from a year ago, but it won't have done so at the same rate it would have in a peak.
During a peak time, the price of a home would increase more rapidly than in a trough cycle, and this means the actual cost to the buyer would be more than would be expected in a period of lower growth.
There is a cycle of property affordability, but in the current Australian landscape, and one that's not looking likely to turn around in the near future, there won't be any rapid price drops as the popular East Coast continues to develop.
How is this affecting buyers?
Buyers are being somewhat strangled out of the market, as demand becomes more competitive and supply dwindles. Prices aren't the only thing holding people back from selling, but also the fact that once a home is sold, the tenants will need somewhere else to live, and finding that next home means entering the race to the right property.
AMP Capital's chief economist, Shane Oliver, suggests that the recent property booms have really affected the way sellers are listing homes. This is affecting buyers who are being forced to wait until these people put their homes on the market. Well, if they don't have a market advantage, that is.
"Average Australian capital city prices have had multiple cycles over the last 15 years with booms around 2003, 2007, 2010 and [even more] recently," said Mr Oliver.
"The cycle is better seen in terms of the rate of property growth, as not all downturns or bust phases have price declines, but rather just a slowing. The cycle can also vary from city to city, with only Sydney and Melbourne being in boom phases recently, and also within cities.
"The main factor driving the property cycle is the cycle in interest rates, with periods of rate cuts eventually driving upswings in the property cycle and vice versa for rate hikes. Around this, the supply of and demand for property also has an impact, along with job security and unemployment."
"The main factor driving the property cycle is the cycle in interest rates."
So, without that cutting-edge advantage, buyers are going to be at a loss to find the right home without getting caught up in a bidding war. Even if they do find a place without a swarm of others vying for the same patch of land, the price is likely to be very high, meaning people are going to have to lower their expectations.
This shouldn't be happening at all. In fact, with a buyer's agent from Cohen Handler, it won't. These industry experts will be able to open up the world of off-market buying to you, meaning you could be bidding on houses and apartments that haven't yet been listed because of the great relationships buyer's agents have with selling agents.
How are the cycles playing out in the modern age?
The way these cycles occur can vary depending on a variety of factors. According to Domain Group, when the market goes through a booming phase because of increased confidence, it is usually levelled out by governmental measures intended to bring order and balance back into the mix. It is, after all, up to the people in power to make sure housing is accessible to everyone. When that doesn't happen quickly enough, however, a buyer's agent can make it a reality for you.
"We tend to see two years of strong activity and rising prices, followed by five or six years when not a lot happens," said CommBank Chief Economist Michael Blythe.
"Two of the most important factors are interest rates and population growth. We have very strong population growth in Australia, which puts a fair amount of demand strength into the equation. The other main variable would be affordability, and the biggest driver of affordability would be interest rates."
The banks are the corporations that set these interest rates, and that is directly affected by how much they have to pay to borrow from the Reserve Bank. This borrowing cost is set out every month by the RBA in the official cash rate, which dictates the interest banks have to pay on their loans.
In May this year, the cash rate was cut to a record low of 1.75 per cent, down from the previous figure of 2 per cent. This was a number continued into June, and many industry commentators are suggesting it's either going to stay at this level or continue in a dive toward an even lower figure.
"When the RBA board last met on March 1, the Aussie [dollar] was sitting at US$0.71 and the general expectation was it was headed lower," said Mr Blythe in a separate March 30 media release.
"By late March, the AUD was above US$0.76 and forecasts for the Aussie to head up to US$0.80 were appearing."
A higher dollar means stronger export markets, which puts less pressure on monetary policy nationwide. That's a hugely positive step for mortgage-seekers.
The way people are buying will also affect how the market is going to react in the short term. A Smart Company release suggests that people looking to "get rich quick" by purchasing property and 'flipping it', will only be doing their finances harm. Property isn't something you should get into for the sole purpose of turning a quick buck. Rather, there is a need to sit on your investment over a period of at least five years – and often longer. Doing this will ensure that the value of your home has gone up enough to make the capital gains worthwhile.
How can you ensure that you're getting the most out of your investment?
The CoreLogic RP Data Pain and Gain Report from December 2015 shows the percentage of homes in various regions around the major capitals that were sold for losses, and those sold for gains.
Not surprisingly with the way Sydney has been performing recently, only 2 per cent of homes in Australia's largest city sold for less in 2015 than they were bought for. That means 98 per cent of houses sold in Sydney last year returned capital gains to their owners.
Melbourne had similar results, with only 2.5 per cent of houses selling for a loss, or falling into the 'pain' category. The national average for this loss bracket, however, was 7.2 per cent, so the two major centres above performed reasonably well.
Even Brisbane wasn't too far off the mark, with 5.3 per cent of houses showing losses. Apartments are a different story. Sydney was the only unit market to show fairly consistent positive returns upon sale, and only 1.7 per cent of apartments sold fell into a pained state. Melbourne was much higher at 8 per cent, Brisbane hitting 15.6 per cent and Perth wallowing at the highest point for the major centres at 23.1 per cent. Just over three-quarters of the apartments sold in Perth last year made a profit, which has pushed people away from that market entirely. Interestingly, the regional apartment market in Perth showed abysmal numbers at the end of the mining boom, with an enormous 45 per cent of rural units selling for a loss.
Looking more closely at the specific suburbs in Sydney and Melbourne shines some light on how sellers can take advantage of their capital gains over time, as well as proving to buyers that making a purchase should be a long-term investment. You'll be able to make money off the property market – absolutely – however, it won't happen overnight.
Take the suburb of Hunters Hill in Sydney – 96.6 per cent of homes in this suburb sold for a profit last year, the average amount of capital gains was a sound $607,500. What's important to take note of is how long these homes were held for that allowed the capital gains to become apparent. The median length of time that a title was held for was 10.2 years, so there clearly wasn't any of the two-year buy and sell strategy in place. It proved remarkably successful, too.
Taking the other side of that into account, the suburb of Randwick had 1.8 per cent of homes sell for a loss, and the median amount of that was a saddening $437,144. The average length of ownership for these homes was just five years, though, so halving the amount of time you own a property can seriously diminish your chances of seeing positive returns.
You'll be able to make money off the property market, but it won't happen overnight.
Shane Oliver believes these gains currently being experienced are going to become more restricted in the next three to five years, but that shouldn't be putting people off their purchasing.
"Overall, price gains are likely to be constrained over the medium term, given that house price-to-income ratios and debt levels are very high and given we have just seen a period of very strong gains in our two biggest cities, Sydney and Melbourne," he stated.
"Sydney has been in the midst of a boom and Melbourne too, but both have started to slow lately."
Melbourne seems to be a much safer place to buy, as the suburb to experience the worst losses through property sales, Manningham, only saw an average depreciation of $137,001 for properties owned for just 4.8 years. The 98.1 per cent of sellers who made a profit averaging $555,000 held onto their titles for 12.8 years. While savvy buying in Sydney could allow you returns of over $600,000, it could also leave you open to significant losses if you're forced to sell your precious patch of land, as an owner-occupier or an investor, in only a short space of time.
Is there a difference between investors and owner-occupiers in the property cycle?
While owner-occupiers tend to buy when values are low and only sell at the other end of a cycle, investors playing the field are more concerned with how interest rates will affect them, and what rental yields are showing for their profitability.
BIS Shrapnel's report on The Residential Property Cycle in Australia also suggests that policy changes such as capital gains tax increases and alterations to the number of negatively geared properties any one investor is allowed to own changes their behaviour.
Taking the rental yield data from CoreLogic at the beginning of May, there has been a decline in the weekly rents that tenants are prepared to pay for a home.
Looking at the rental yield, last year's figure for Melbourne stood at 3.3 per cent, which has now dropped to just 3 per cent. Sydney has seen a similar decrease: at 3.5 per cent 12 months ago, and now at 3.3 per cent.
"At the same time last year, rental rates increased by 1.7 per cent, which indicates a sharp slowdown in rental growth over the past year," said CoreLogic Research Analyst Cameron Kusher.
"With dwelling approvals at recent record highs and construction activity set to peak over the next 24 months, accompanied by many new properties still to settle, we anticipate that the weak rental market conditions will persist with rental growth continuing to slow and/or fall in most capital cities. Based on current market conditions, landlords won't be in a position to lift rental rates and may actually need to reduce rents in order to keep their tenants."
This is hardly going to be enticing investors into buying new rental properties, but they could just be adding another page to their portfolio in a bid to have an investment that is doing nothing but sitting and gaining in value over a long period of time. It might act as a holiday home, but whatever the intentions for investing, this group of people won't be out of the market by any means.
There's going to be a significant amount of demand for the limited supply in the years to come, so making sure there's a buyer's agent on hand is going to help significantly.
When is the market likely to change?
The short answer to this question is that it's unlikely to change in the next few years at least. Australia's population is increasing at a high rate, which is only going to continue to increase demand. Even if these new residents start looking for rentals, they'll drive rents up, making more people want to buy their own properties and causing even more competition to come into the landscape.
The Australian Bureau of Statistics reports that in the 12 months leading up to September last year, New South Wales welcomed 102,200 new inhabitants, and Victoria just pipped them at the post with 102,300. The total population of Australia has also ticked over the 24 million mark this year, and it's steadily on the rise.
A new buyer on the scene is going to want to give themselves the best chance possible to buy a home, so enlisting the services of a buyer's agent is a smart move. Even if you've been looking without success for a long time, it'll pay to boost your chances with professional help.
No more waiting around for the right home to jump out and hit you in the face. You have the opportunity to take control in an errant market – all it's going to take is making the right decision and talking to a Cohen Handler buyer's agent.