[Podcast] What makes an investment-grade location? With Brett Warren

As an investor, it's crucial to understand the dynamics of property cycles and how they can significantly impact property prices, rental yields, and overall investment returns.

Today I’ll be chatting with Brett Warren and at the end of the show I hope you’ll understand the various factors that drive property cycles so you can identify opportunities.

Identifying an investment-grade location

Following a once in a generation boom in 2020-21 driven by falling interest rates at a time of strong demand, our property markets fell into a slump in 2022 as interest rates rose.

However, it now seems that our housing markets are looking for a floor as “asking prices” are increasing around the country, the rate of decline in house prices is falling in some areas, while median house prices are increasing in other locations, particularly Sydney.

In other words, the property market is doing what it always does – it is working its way through the market cycles driven by various factors such as interest rates, consumer confidence, supply and demand, economic conditions, and government policies.

Understanding property cycles: a deeper look

Each phase of the property cycle has unique characteristics that influence property values and investment opportunities.

The Boom Phase

• Tends to be the shortest phase
• Strong demand from investors and homeowners driven by rapid increases in property prices
• Several factors contribute to this demand:
  • Low-interest rates
  • Strong economy
  • Population growth
  • Favourable government policies
• Attracts a whole new generation of investors into the market and would-be homeowners

Key characteristics of the boom phase include:

• Rapid increase in property prices, often exceeding 20% per year
• Low unemployment rates and strong wage growth
• High consumer confidence and optimism
• Increased construction activity and new property developments

The Downturn Phase

• Slump phase
• Follows the boom
• oversupply of properties due to excessive construction activity
• Vacancy rates increase
• Rental prices decrease.
• Property prices may drop by around 10% or more.

The recent property slump of 2022-23 wasn’t brought on by an oversupply of properties but was initiated by a lack of affordability and then exacerbated by rising inflation and interest rates, trashing consumer confidence.

Key characteristics of the downturn phase include:

• Stagnant or decreasing property prices
• Rising unemployment rates and slowing wage growth
• Reduced consumer confidence and pessimism
• Decreased construction activity and property development

The Stabilization Phase

• Occurs as interest rates fall and pent-up demand accumulates.
• Property prices remain relatively flat
• market activity stabilizes
• Buyers and sellers cautiously re-enter the market
• Number of transactions increases.
• This phase can present opportunities for investors

Key characteristics of the stabilization phase include:

• Flat or slowly increasing property prices
• Stable employment and wage growth
• Improving consumer confidence and optimism
• Balanced supply and demand in the property market

The Upturn Phase

• Vacancy rates decline
• Rents increase
• Property values rise again
• This phase can last three to four years
• Attracts more buyers and investors
• Builders and developers also commence new projects

Key characteristics of the upturn phase include:

• Steady increase in property prices
• Continued improvement in employment and wage growth
• High consumer confidence and optimism
• Increased construction activity and property development

Influential factors on property cycle length

The length of a property cycle can be affected by various factors, including:

• The overall state of the economy, including GDP growth, inflation, and unemployment rates
• Government policies, such as tax incentives, zoning regulations, and infrastructure projects
• Central bank interest rate policies and access to finance
• Population growth and demographic shifts

The most recent property boom, which ended around early 2022, was prolonged by a lengthy period of falling interest rates, but it eventually came to an end when a lack of affordability kicked in and this was only exacerbated by a swag of interest rate rises.

Regional variation in property cycles

While the media tends to generalize about “the property market”, there is no single property market – many submarkets around Australia exist.

Each state in Australia can be at a different stage of its property cycle, with markets segmented by geography, price points, and property types.

Even within each state, various submarkets perform differently depending on the specific market segment.

The role of fear and greed

Fear and greed are powerful drivers of property market cycles, often leading to irrational decision-making and market overreactions.

The emotions experienced by homebuyers and investors can amplify the effects of market cycles, causing them to overshoot or underperform.

During the boom phase, FOMO (Fear of Missing Out) drives demand as people worry about missing the profits that others have enjoyed.

This can lead to a buying frenzy, causing property prices to increase at unsustainable rates.

Conversely, during the downturn phase, FOBE (Fear of Buying Early) can take hold, as potential buyers fear purchasing a property only to see its value decline further.

This phenomenon can result in prolonged periods of stagnation and suppressed market activity.

The problem is “crowd psychology” tends to influence people’s home-buying decisions, often to their detriment.

What’s ahead for Australia’s property markets?

The Positives for the Property Market

1. Decline in household size
2. Returning immigrants
3. Low rental vacancy rates
4. Government support
5. Low listings
6. Interest rates
7. Auction clearance rates

The Negatives for the Property Market

1. Impact of variable rate hikes
2. Fixed-rate loan expirations
3. Future interest rate hikes
4. Rising household debt servicing payments
5. Deteriorating economic conditions
6. Reduced home buying capacity

Conclusion

Understanding the cyclical nature of property markets in Australia is crucial for investors to make informed decisions about when and where to invest.

By recognizing the different phases of property cycles and the factors that influence them, investors can capitalize on opportunities and minimize risks.

Keeping emotions in check and adopting appropriate strategies for each phase can help to ensure long-term success in the property market.

Links and Resources

Michael Yardney

Brett Warren – National Director Metropole Property Strategists

Get the team at Metropole to help build your personal Strategic Property Plan Click here and have a chat with us

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Some of our favourite quotes from the show:

“The cycles vary length dependent on a whole range of socioeconomic factors, not because of a period of time.” – Michael Yardney

“Over the years, the government has been picking on property investors.” – Michael Yardney

“The risks that tend to get you are the risks that you didn’t know.” –  Michael Yardney

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