Understanding the property cycle: What does each phase mean and how can you identify them?
Aaron Tan · 14 November 2022
Understanding the property cycle: What does each phase mean and how can you identify them?
By Aaron Tan
Read time: 9 minutes
If you watch the news or listen to the radio you have probably heard about the elusive concept of the ‘property cycle’. It’s a catchy sound-bite that the media likes to trot out every few years though it’s a concept that few people truly grasp and even fewer can exploit. In this article, I’ll try to break down stages of the property cycle and, better yet, help you understand how you can make it work for you.
The property cycle is like history – it tends to repeat itself. Humans are instinctively creatures of habit, no sooner have we crawled out of a hole before we fall again into the same traps.
Think of the property cycle as having four key phases: “the Boom”, “the Slowdown”, “the Slump”, and “the Recovery”. Like clockwork, these phases inevitably follow one another. The difficulty is that no one can predict how long each one will last. Hopefully with my help, you’ll be able to at least spot the signs and make the best of the situation.
So let’s break it down:
The Boom
During this phase there are high confidence levels in the property market as well as high greed levels. Any halfway decent property that goes on the market is like throwing a chip to a flock of seagulls and properties often sell for more than the asking price. Buyers compete with each other to secure the properties and as a consequence sellers take advantage of the competition by increasing their asking prices. All rational thought goes out the window as a buying frenzy ensues which pushes property prices to their highest peak. This phase is sustained by investors envying the success of others – their high property returns and the capital growth potential motivating everyone to double-down.
What are signs of the Boom?
- Property prices increase
- Rental yields decrease
- Developers capitalise on the demand and flood the market with new properties
- Time on market for property sales decrease
- High market confidence ensues
- Media speculation is high
- Auction clearance rates increase
What should you do during this phase?
Unless there is a bargain that is too good turn away, DO NOT PURCHASE DURING THIS TIME. It’s better to wait for the market to correct before entering the market again. Would you buy a coat at full price if you knew it was going to be half-price next week? At the end of the day, the market’s strength is always determined by perception and it can take very little to tip things into the Slowdown.
The Slowdown (or ‘Correction Phase’)
Once prices rocket sky-high, the backlash of the Slowdown phase follows the Boom. These prices have hit levels that are unaffordable, so many buyers are priced out of the market by the high asking prices of the sellers which leads to a stagnation in the market.
What are signs of the Slowdown?
- Property prices tend to stabilise and in some cases decrease however they still remain unaffordable
- Oversupply of stock on the market
- Construction price falls
- Rental yields start to increase
What should you do during this phase?
With prices still very high and no sign that you’ll see any quick capital growth, I would recommend watching neighbourhoods you’re interested in but continue holding off purchasing in this market for now.
The Slump
After the Slowdown, the Slump will follow with an inevitable oversupply in the market. This is a result of a combination of factors: properties will take longer to sell due to their unaffordable prices, there will be a flood of new properties completed from the tail-end of the Boom, and buyers that had purchased during the boom who struggle with repayments will be forced to sell. With plenty of supply on the market, buyers will soon be spoilt for choice and property prices start to decrease due to the reduced competition.
What are signs of the Slump?
- Property capital growth either stagnates or falls
- Time on market for properties continues to increase
- It is harder for investors to obtain bank loans
- Market confidence is low
- Rental vacancies decrease
- Rental yields will increase
What should you do during this phase?
As the great Warren Buffett once said:"(Be) fearful when others are greedy and (be) greedy when others are fearful.” While the rest of the market is recovering from their losses after the boom, this is your time to look for bargains. Don’t be afraid of the over-cautious media spelling doom for the property market on their ticker tape reports. You will have the greatest chance to negotiate on prices during this time and capitalise on lower volume of buyers in this market. This is the best time to buy! The one thing you can always rely on is human nature: we are destined for Recovery.
Recovery (or ‘Upturn phase’)
During this point of the cycle, property prices have dropped to their lowest points and are now affordable. Property prices continues to slowly increase as buyers are still cautious from the Slump. As this phase continues, it will draw in more investors and first home buyers into the market again pushing up prices towards the next boom. After every downturn, it's all about rebuilding confidence in public perception. If you’ve taken our advice about shopping in the Slump, get ready to watch your properties go from strength to strength as people recover their faith in the market.
What are signs of Recovery?
- Property prices start to increase
- Stock levels start to tighten
- Time on market for properties decrease
- Confidence in the market starts to build
What should you do during this phase?
This is the second best time to purchase a property. Prices are still affordable and market confidence is on the rise. If you were unable to find something you loved during the Slump, you still have time to get in good during Recovery.
I realise it will feel strange and even counter-intuitive to buy when the market is at its lowest point. Humans are naturally risk-averse;when everyone and their mother is telling you that the market is crashing, we let our fears get the better of our rational judgement. My job is to help my client see past the fear-mongering and identify situations that are ripe for investment. While these are just the basics, I hope you walk away with some helpful tips for understanding how the market cycle works and how you can make it work for you. Good luck and happy shopping!