Understanding the property cycle

The property clock explained…

Given the amount of discussion about house price forecasts of late & the typical conjecture that eventuates, it feels like it is time, once again, to discuss the obvious – that there is a distinct residential property cycle in Australia.

In short

Past cycles have averaged between 7 & 8 years in duration.

They have largely been smooth affairs – only on rare occasions have they rapidly peaked & troughed.cycle arrows-small

But I do think that moving forward, our residential cycles will get shorter & that they will become more ‘lumpy’.

Future lows might even drop below past furrows.

There will very likely be less growth on an annual percentage basis, throughout an entire cycle, than in the past.

But essentially, what drives a property cycle & how it behaves is unlikely to change.

Cycle 101

Many things drive a property cycle – most of which are recurring – such as liquidity; economic growth; rising demand; investment returns; scarcity of supply & consumer confidence.

But there is always a “factor X” which builds influence & is often the key ingredient/s that causes imbalance.

At present, these X-factors include SMSFs; Chinese buying; FIRB rules & the lower Australian dollar.

You can see these in operation in Sydney; Melbourne & now, too, across parts of Brisbane.

Property clock

The property clock is a simple but effective tool which outlines where certain locations & product types are positioned in the overall property cycle.

There are four phases of the property cycle including a recovery; upturn; downturn & stagnation.clock

The cycle also peaks & troughs.

I like to think of the four phases as spring, summer, autumn & winter.

This seasonal description helps define what each phase is like – things are warming up in spring or cooling down in autumn.

The four phases of the property cycle, however, are not the same duration as the seasons.

Sadly, spring & summer go much quicker than autumn & winter.

Often, the winter or stagnation phase of the cycle can last for three, sometimes four years.

The graphic below outlines the key measures we use to determine the position of a location or housing product in the property cycle.

What does this mean?

Many ask us for our ‘property clock’; in fact, the ‘Matusik Property Clock’ is one of the more searched terms in the Missive section of our website and in internet search engines in general.

I would like to have ownership over the concept, but alas, I don’t.

To me, the property clock provides a sense of what to do – well, at least our suggestions as to what might be the best course of action real estate wise – during each phase of the property cycle.

For example, the recovery phase is typically mildly favourable to sellers.strategy-design

  • Sellers should expect a quick sale; especially if the property is well priced, presented & marketed.
  • First offers on paper are often the best.
  • Buyers need to make sure they don’t overpay, but they can miss out if they take too long.
  • Renovators need to understand the market’s limits. Overcapitalisation often happens in recovery market locations.
  • Renters should consider buying or locking into longer lease terms.

In contrast, a downturn market is a buyer’s market.

  • Sellers should not expect a quick sale; often it will be best to delay selling until market conditions improve.
  • Buyers can make hard offers, especially when buying with limited or no conditions.
  • For sellers, first offers are still often the best.
  • Buying decisions can be made more slowly.
  • Renovators might need to hold an asset for considerable time.
  • Renovate for rental return first, resale uplift second.
  • Renters can often negotiate a better lease or premises.

An upturn market is a seller’s market.

  • Sellers should expect a quick sale, especially if product is well priced, presented & marketed.
  • Buyers need to make sure they don’t overpay.
  • Second or subsequent buying offers can often be better than the first.
  • Buying decisions often need to be made quickly.
  • Renovators, again, need to understand the market’s limits.  Over-capitalisation is very common in upturn market locations.
  • Renters should be considering longer lease terms.

A market in stagnation is classically a balanced market – where one can sell & buy at similar value.

  • Sellers can sell quickly if product is very well priced, presented & marketed.
  • Ironically, buying decisions often need to be quick for well-priced and/or recently renovated property.
  • First offers are often the best.
  • Some form of renovation is often needed to attract interest to a property.
  • Renters can still negotiate a better lease or premises.

To sum up

When it comes to future property cycles, it might be best to think in three simple words:

  • Shorter
  • Lumpier
  • Less

There are four phases to the property cycle:

  • Recovery = spring
  • Upturn = summer
  • Downturn  = autumn
  • Stagnation = winter

There are somewhat distinct real estate actions to take, depending on which phase you are in when it comes to the property cycle.


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For more about Matusik Property Insights go to www.matusik.com.au


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Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive

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