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What's a property cycle and where are we in this one?

What's a property cycle and where are we in this one?

If you’re looking to buy or sell property, understanding property cycles and recent market performance can help.

The term ‘property cycle’ is often used in discussions about the real estate market. But what does it mean? Where are we in the current cycle? And how could you use that information to help you make decisions about buying or selling property?

Cycle paths

While Australian property prices have risen over the long term, they don’t tend to go up at the same rate year after year. After a period of rising values, the market generally has a lull, in which prices stagnate or even fall a little, before starting to rise again. Cycles tend to last about eight years.

“Historically at least, we tend to see two years of strong activity and rising prices, followed by five or six years when not a lot happens,” says our Chief Economist, Michael Blythe.

What drives these cycles?

Many factors can affect property prices, including housing supply, the economy, the availability of credit, and government policies.

“Two of the most important factors are interest rates and population growth,” Blythe says.

“We have very strong population growth in Australia, which puts a fair amount of demand strength into the equation,” he says. “The other main variable would be affordability, and the biggest driver of affordability would be interest rates.”

Where are we in the current cycle?

Property values began their current growth phase in June 2012, according to CoreLogic. Since then, values across the combined capital cities have increased by 24.3%.

Most of the growth over this period has come from Sydney, where values have increased by 38.8%, followed by Melbourne, where values have gone up 23.6%.

After almost three years of strong rises, the rate of price growth has slowed. By the end of March 2015, the annual growth rate across the capitals was 7.4%, the lowest since September 2013, according to CoreLogic.

But property values are still rising, particularly in Sydney.

“This cycle is a bit different as interest rates are at record lows and have been at extremely low levels for longer than any other rate cycle we’ve seen,” Blythe says.

These low interest rates have increased demand for property, especially among investors.

Different cycles

It’s important to understand that it’s not one size fits all in the Australian property market. While Sydney and Melbourne prices have grown strongly in the current cycle, dwelling value growth since June 2012 has been less than 10% in Adelaide, Hobart and Canberra, according to CoreLogic.

Different areas can go through different cycles. One way of finding out whether conditions in a particular market suits buyers or sellers is to read our Home Buyers Index report,which looks at effective supply and demand in property markets around the nation.

What does this information mean for me?

Understanding where we are in a cycle could help you make a decision about whether to buy or sell property, depending on whether you think values are likely to grow, stagnate, or fall.

However, you should bear in mind that market forecasting is difficult. Rather than try to time the market for short-term gain, many investors prefer to think further into the future, and aim for long-term property growth.

Speak to a Home Lending Specialist today to discuss your property plans.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. You should consider seeking independent financial advice before making any decision based on this information. Commonwealth Bank of Australia ABN 48 123 123 124.