The residential property market does cycle.
This time around isn’t that much different from the last time & the times before that.
There is always talk about “how it will be different” this time around.
But history shows that there is a set of certain variables which, when combined in the right way (like ingredients in a recipe), drive the property cycle.
The residential market is set to improve; and in some locations and for certain product types, quite substantially.
Five market phases
There are five phases of the property cycle – trough, upswing, peak, downturn & recovery.
Since 1880 – the date when housing statistics started to be recorded – there have been ten cycles in Australia.
They have averaged eight years in length from trough to trough or peak to peak.
There have usually been five years of improving market conditions – historically end values rose 11% per annum.
There are also periods of decline, averaging three years in duration, where values – in the past – have fallen, on average, by 5% for each of the three downturn years.
Overall, Australian residential property owners have – again in the past – enjoyed annual capital gains of 8.5% per annum when property is held for a whole cycle.
Many residential markets across Australia are in the recovery phase of the property cycle.
Several Queensland regions have also entered a recovery phase being: Bundaberg; Toowoomba; Rockhampton; Mackay & Townsville.
The recent flooding in Bundy might hold them back a while, but the broad indicators do suggest that Bundaberg is set to improve.
Three Queensland markets are knocking on the recovery door, so to speak, and these include Ipswich, the Gold Coast & the Sunshine Coast.
The recovery phase is characterised by these measures:
- Rising sales
- A return to price growth, albeit usually quite mild
- Improving yields
- More building activity
- A more equal market i.e. not a buyer’s or seller’s market
Wider market influences
So back to the original premise of property cycles, here are my thoughts on what drives the cycle:
Liquidity – the availability of funds & their cost drives the cycle.
When there is more money available & it is cheaper (like now), this helps to improve the property market.
When the opposite takes place, then the residential cycle enters a decline.
The RBA wants this to happen – an improving market leads to more sales, building activity & general spending.
This means more government receipts; more employment & better company profits. When things are getting too heated – i.e. inflation is rising – the RBA will lift the cash rate, making money cost more.
Economy – you need a job (it used to be a full-time one, but those rules don’t really apply in today’s portfolio-orientated career world), to borrow & buy a property.
So business profitability first, then employment creation are important factors which influence the cycle.
This is why we regularly report on jobs & company profits.
Confidence – the “animal spirits,” as John Keynes once called them. Hard to pinpoint; even harder to predict; but bloody important.
These days, we seem spooked by every little microscopic detail, much of which means very little in the scheme of things.
Confidence is slowly getting better. It should be much higher. Our current skittish nature is holding back the housing recovery.
Returns – when residential returns start to become competitive & also are seen as less of a risk, investors start buying again.
This is now happening.
Gross rental yields have improved by about 0.5% over the last 12 months. This attracts the more experienced investors. The novices start buying once the general media start reporting positive property stories on the nightly news.
Demand – not just population growth, but household creation. In short, this equates to more “bums on seats”.
Australia’s population growth rate has increased significantly in recent years, creating the need for more new housing.
Often, new migrants (and of course an increase in more babies being born), are housed in our existing stock.
As we have outlined in past posts, we have quite a bit of spare capacity in our established housing market.
But something happens as the residential market recovers – caused by a mix of the elements above – and the demand for new property rises.
Parents help get their boomerang 30-year-olds into their own place; other relations leave the somewhat crowded house for a place of their own & so forth.
Scarcity – new supply falls short of the increasing underlying demand & the amount of residential stock for sale & lease drops. More people go to auctions, open houses & display suites to find a crowd; offers being made & increasing contracts being executed.
Human nature – the “wax & wane” as I like to say in my presentations…..being overly cautious (like now) keeps the housing market subdued, whilst greed drives it over the top.
As a general rule, we believe the worst & when we think we want something, we must have it. “No” & “More” are two of the first words that most toddlers learn to say.
Pity those words aren’t more in balance at the same time.
Right now, we need a little less “No” & a bit extra “More”.