We get it. The market is hot. Like, boiling hot. But how long is it going to last?
To be honest, anyone who gives you a definitive answer is lying. Why? Because over the past year, few predictions relating to the property market have proven true. As the pandemic waged war on Australian wages, many commentators predicted a crash of epic proportions. But the crash never came. Instead, house prices skyrocketed.
And they look to keep rising—at least for now, thanks to record low interest rates and strong Government support encouraging Australians to take out home loans in record numbers. From March 2020 to March 2021, the number of new mortgages taken out increased by 55%. In the last quarter, Sydney’s property market rose by 6.3%.
ANZ recently announced they predict a 19% rise in Sydney house prices through 2021, before slowing to 6% in 2022. Keep in mind though, this is the same bank that forecast major price falls last year. Regardless, their predicted price bump won’t be sustained for long, noting the possible rise in fixed interest rates available for in the second half of 2021. The longer-term issue of lower population growth due to closed borders also makes the future of the market hard to predict. Sensing a theme here?
Though we’re living in unprecedented times (what, you thought we were done with that phrase?!), looking back at the history of property market cycles could help us get a better grasp on what to expect. Historically, house prices move through four phases over an eight to ten year “property cycle”. Commentators like to put their own spin on each stage, but generally it goes like this: Boom, Bust, Bottom and Recovery.
Population growth causes demand for real estate from both investors and owner-occupiers. Property values then rise as supply fails to meet demand. Simultaneously, builders and developers try to increase supply by constructing new homes. At some point, the pendulum swings too far in the other direction, and we’re left with an oversupply of property, which floods the market and leads to a decrease in home values and rent reductions. Of course, throughout the phases of this cycle there are all kinds of extenuating circumstances to consider, including population growth, employment rates, GDP growth, the number of listings and sales, and now, a global pandemic.
Here’s a breakdown of how the cycle has played out in the past.
Usually the shortest phase of the property cycle (2+ years), property prices increase as much as 20% a year, bringing a new generation of investors into the market while homeowners increase demand for real estate.
Also known as the downturn phase, the bust follows the boom after eager developers flood the market with properties in response to the demand during the boom phase, leading to an oversupply of property. Historically, growth comes to a halt or drops by 10% during this phase, which lasts a number of years.
Pretty self-explanatory, really. Though it’s not all doom and gloom—the market begins to move on, with falling interest rates and pent-up demand during the slump setting the stage for the next property upturn. Slowly but surely, things begin to stabilise (slowly being the operative word.) Ironically, the bottom phase can be a time of great investment opportunity.
Things are starting to look up. Vacancy rates are falling, rents are on the rise, and house values are on the rise. Typically lasting three to four years, the recovery or ‘upturn’ phase sees more buyers and investors enter or return to the market due to affordable house prices and attractive returns from property investments. Demand starts to ramp up again. Prices start to become less affordable. Developers start drawing up new plans. You can see where this is going.
Based off stats in the past year, it’s likely we’re in the midst of the boom phase right now. But if ANZ’s predictions are anything to go off, we might actually still be in recovery. Buckle up.