Understanding property cycles

Whether you're looking to buy a house in Australia for your family or are in the market for a positive cashflow property as an investment, it's important to understand how property cycles may affect your purchase.

What are property cycles?

As the name implies, a property cycle is a series of events that repeat themselves over time that affect the property market. These concern everything from prices and vacancy rates to demand and other economic factors.

According to the research paper Understanding Property Cycles in a Residential Market, authored by Richard Reed from Deakin University and Hao Wu from the University of Melbourne, understanding these cycles can be a big help to home buyers.

"It is argued that an increased level of certainty about cycle behaviour in particular suburbs will give households a higher level of confidence when considering whether and when to enter the market," stated the abstract for the paper.

"In extended periods of high volatility it is argued that a better understanding of housing cycles will allow more homeowners to avoid negative equity and the stress associated with repossessions."

Different parts of the cycle

While cycles may differ in length and other factors, they generally follow the same trajectory. This includes the beginning period when property values gradually start to increase, which gathers speed as more investors enter the market and push prices up even higher.

Eventually the market reaches its apex, where values are pushed to their limit. After this phase comes the correction, when values become more subdued. The decline in prices may become steep if many buyers decide to sell at once.

Eventually, the cycle will repeat itself yet again.

The key for buyers is to understand at which point they're entering the market, and how this knowledge can help them.

Understanding property cycles can help you determine when to buy, when to sell and at which stage making certain decisions makes the most sense.