This cycle started in May last year flamed by the first home buyers boost then spurred on by existing home owners upgrading and finally by investors re-entering the market. But the market has now been slowed by the triple whammy of multiple rises in interest rates, increasing unaffordability and falling consumer confidence.
Over the last few months home buyers and to a lesser extent property investor seem to have moved to the sidelines, finance approvals have dropped, auction clearance rates are declining and in some areas prices have fallen slightly.
Yes, we've moved into the next phase of the property cycle.
The last year or so was like all the other cycles I have lived through – greed and fear got out of balance. And properties in some of our suburbs increased in value by over 20% a year.
Many Australians stopped thinking of their home primarily as shelter and a long-term investment, and had begun to think of their houses either as a get rich quick scheme or a very large automatic teller machine. This was spurred on by rising property values and all the hype in the media. But this has all changed now and the days of double-digit property value growth are behind us for awhile.
Lately I've been hearing from property investors who are concerned about what's ahead for property. I try to reassure them that the property market is behaving normally. This is not the end of this property cycle – it is a mid-cycle slow down as some of the fundamentals realign. That doesn't mean growth in values has stopped, it means the markets in the major cities are growing more slowly. And at the same time rents are rising.
As our cities mature they become more unaffordable. In every state we have multiple property markets with some properties increasing in value while others are falling in value. There is an ever expanding divide between the have's and have not's and quite simply - the rich are getting richer.
Properties in the lower socio-economic areas and many outer suburbs tend not to perform anywhere near as well as properties closer to the CBD and the water. Families in these areas are suffering more from rising interest rates as they take up a larger portion of their disposable income.
Of course, our property markets have always moved in cycles of rapid upward movements, followed by periods of flat or even negative growth, followed by another move upwards. I have often suggested that the sooner an investor has traded or invested through a cycle, the better investor they will be. Then they'll understand that slower phases in the property cycle, such as the one we are currently experiencing, are normal and they will know to take advantage of it.
You see, shrewd investors, whether they invest in the stock market, property or whatever, share an important strategy. They know that the best time to buy is not when the market is hot, when buyers are out in droves competing for properties that are snapped up at alarmingly increasing prices. Rather, they wait and buy when the market slows down.
Experienced investors know that the market is cyclical. They know that no matter how frantic the market may seem, sooner or later it will slow down and they will be able to buy at their leisure.
In a boom market, buyers often find themselves losing out to another buyer who is driven by fear and greed. The fear of missing out on the property boom and the greed of wanting to own (more) properties – both very human emotions. Now, when there are fewer buyers and competition is reduced, there is time not only for thorough research, but also to compare, negotiate and drive a harder bargain.
Over the last few months I have spent a lot of time researching our property markets, the economic markets and financial matters. I have done this to protect my own property portfolio, to help our private clients and to educate the readers of this blog.
I have spoken to as many experts as I could (not theorists, but experienced authorities) and I have poured over large amounts of research data and compared my conclusions with my "inner circle network" of property friends.
We have come to some interesting conclusions...
1. This property cycle will eventually end – but this isn't it! There are some great opportunities out there and the markets will reward those who know how to take advantage of them. This cycle is likely to come to an end (not a crash) in a few years time (possibly 2013) because interest rates will keep rising, pushed up by a booming economy. Between now and then we'll have a few good years and property values will continue to rise - but more slowly than before. If you sit on your hands worrying and waiting for a crash you will miss out on some great investment opportunities right now.
2. The property investment strategy used by the vast majority of property investors during the last few years will not work over the next few years.
3. We are in a new era of property investing. I have recently seen or spoken with a number of investors who are hurting from the credit crunch of rising interest rates and changing bank lending criteria. Some have to sell their investment properties. Others are worried they may have to in the future. Clearly their investment strategy did not work for them.
4. Interest rates will keep rising and inflation is here to stay – at least for awhile.
5. Our economy will perform strongly over the next few years driven by a resources boom. And our property markets will be underwritten by this strong economy, rising consumer confidence, the huge deficiency of housing at a time of increasing demand, and rising cost of construction.
What this means is that to be a successful property investor and to take advantage of the opportunities this changing market will present over the next few years, it is very likely you are going to need to take a different approach to the one you took over the last few years.
Some readers will definitely need to do different things to protect their current property portfolio. You just won't be able to go out and buy any property and hope for the market to increase and cover you. It will be a time to research more carefully and buy more selectively.
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