Property 101: The Market Cycle
The Market Cycle
It’s generally accepted among economists that the property market follows a somewhat predictable trend – That every ten years or so, we experience a cycle of different stages.
A boom, a slump, then a recovery.
• Houses sell faster
• Prices increase quickly
• Buyers rush back to the market
• Houses on the market longer
• Less buyers/sellers
• Prices fall or stagnate
• Prices increase gradually
• Demand outstrips supply
When the Boom phase commences the media will tell you it’s unsustainable and will end in a crash.
- Property prices rise
- Rents rise, though not as fast as property prices, so you’ll find yields are lower for new purchases.
- Properties sell much faster.
The slump is usually the longest phase in the property cycle. Contrary to popular opinion property values don’t necessarily fall during a Slump, they just stay the same.
There are a couple of things in play that protect us from falling values:
- Kiwis don’t like selling their house for less than they thought it was worth.
- Falling prices are bad for the economy, so our government will use monetary policy to prop up falling demand. They’ll also pull those levers the opposite direction when they feel the market is too hot.
You’ll also see higher rates of vacancy in the slump, properties on the market for longer, and you’ll notice the odd mortgagee sale and some unhappy real estate agents!
The recovery phase happens quickly, as we transition from slump to boom. Blink and you’ll miss it.
Rents begin to increase. Days on the market are fewer. Buyers are paying a little more for that bigger house. The boom is coming and you’ve got every reason to be excited, but if you’re waiting for this time to buy your first rental property, you’ll probably never own one.
Professional investors buy at all stages of the market cycle.
Whatever stage in the market cycle we’re currently in, be it a hot market or a cool one, there are advantages to being a buyer in both. The advantage of a hot market – you hopefully get to enjoy riding that wave for a while after you purchase. What’s better about a cool market though – you’ll have more choice and less pressure to pay top dollar and can buy into higher yields.
First time investor fears
The biggest fear many first-time investors have is that they will buy a property at the wrong time in the market cycle. Property values have dipped before and will likely dip again. They worry that if you buy a property today, it’ll be worth less tomorrow.
If this sounds like you, we recommend implementing a long term growth strategy with a balanced yield objective that will cover your regular weekly outgoings.
Here’s some points to consider:
The only time property values matter are on the day you buy and the day you sell. The lame roller coaster in between those two days is boring and irrelevant, provided you have sufficient rental income to sustain you.
Property investment is a long term game. If you own your investment for 10 years (and you should always plan to hold at least that long), you will probably experience a period at some point when values drop a bit.
If you lack the confidence to invest in property, the key is to focus on what your property would be worth in 10 or 20 years. The only people who lose money in real estate are those who sell at the wrong time. It’s not the people who buy at the wrong time.
Keen to get started? Learn more at our next property investment event.
Register for our next property investment talk in Christchurch