Upswings trumps downturns in historical analysis

Historically, house prices don't go through wild boom and bust phases.

Instead, we tend to see a period of gains - quite often surging, followed by a slight decline or flatlined pricing according to Dr. Nicola Powell, Domain’s Chief of Research and Economics

Interestingly, Domain’s latest analysis of Australia’s combined capital house price cycles reveals that in the last 30 years the duration and steepness of an upswing is longer and greater than a downturn.

Dr Nicola Powell explained:

"There’s no denying that economic shifts and global influences are making their mark on consumer sentiment and subsequently, the Australian property market.

When property prices fall it can understandably make many Australians feel uncertain about their property journey, however, it is important to remember that property has historically moved through upswings and downturns, and there are lessons that can be learnt from previous price cycles.”

What does this upswing really mean?

According to Dr Powell, on average, the duration and price growth tend to be greater for an upswing, seeing house prices rise 32.7% from the point of price trough to peak and spanning 2.75 years.

Meanwhile, on average, downturns have seen house prices decline 3.0% from the point of price peak to trough, spanning 0.75 years.

Dr Powell said:

“Our analysis of directly comparing the steepness and duration of an upswing and subsequent downturn since 1995 supports the argument that it is not timing the market that is important, it is the time spent in the market that counts.

It also illustrates that the duration of an upswing tends to be longer than the subsequent downturn.

This results in a greater increase in price relative to the subsequent decline, and downturns have historically been shorter and less severe compared with the preceding upswing."

What does this data mean for the current downturn?

There have only been four periods where house prices across the combined capitals declined annually since the early 1990s - during 1995-96, 2008-09, 2011-12 and 2018-19.

All downturns over the past three decades had an annual decline that peaked at less than 10%.

The decline was minor relative to the higher rate of incline that had preceded it.

In comparison, all upswings had an annual increase that peaked above 10%, apart from the pandemic-interrupted upswing of 2019-20.

Dr Powell further explains:

"As per historical standards, the premium price point is showing the greatest weakness, clearly evident in the most expensive areas of Sydney and Melbourne.

Premium-priced areas tend to lead price cycles, and while they may appear more vulnerable during a downturn, they see greater rates of price growth during the upward growth phase.

This also means that when we move into a recovery phase, it will be evident first across the premium price-point.”

This means the difference between the current downturn and its predecessor, is that interest rates are rising, increasing the cost of a home loan and reducing borrowing capacity at a time when living costs are soaring.

While this might mean a bigger decrease in prices than we have historically seen, this analysis suggests that it is unlikely we will see a return to a pre-pandemic price.

With the current combined capital’s median house price at $1.065 million; it would need to drop by a further 25% to reach pre-pandemic pricing.

Dr Powell concludes:

“The speed and scale at which prices soften depends on many factors – however, the downturn will be somewhat shaped by how high and quickly interest rates go up, and the height inflation reaches. Furthermore, tax settings, banking regulation, population and income growth, and the responsiveness of new housing supply to growing demand all influence property prices.

It is important for Australians to remember that the ups and downs of prices are illustrative of a healthy property market – just like the expansion and contraction of an economy.

If we view property as a longer-term investment, timing the market becomes less important.”

What do we learn from this?

It is important to remember that the ups and downs of prices are illustrative of a healthy property market – just like the expansion and contraction of an economy.

If the past 30 years of price cycles are used as a gauge, it tells us to focus on the big picture rather than getting distracted by trying to pick a price peak for selling and a price trough for purchasing.

It is the view that property should be considered as a longer-term investment.

If we do this, timing the market becomes less important.

Source of charts and commentary: Domain.com.au 

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.