The general pessimism surrounding Australian property markets should not influence all of your investment decisions.
We have data that shows that some property segments are actually flourishing. The property market is not one market. It’s made up of different markets and going up and down at various speeds and times.
The general property segment is currently declining which is affecting all the other property segments. Nonetheless, other segments are doing well.
This decline is normal as it is part of the property cycle where the prices increase, decrease, stabilise, and then increases again. As an investor, there will come a time where you will hit a phase of economic weakness. This may last 1-2 years. This phase is part of the property market cycle and is as regular as clockwork. Demand attracts more developers who build until saturation and than it takes various years to absorb the excess before demand exceeds supply once again and the cycle repeats.
The Australian property market cycle
There are generally four stages or phases in the property market cycle.
- The Value Stage where property prices are flat. This is the stage of the cycle where people are enticed to purchase property.
- The Growth Stage where the prices begin to rise. It is usually gradual at first, but will then speed up.
- The Peak Stage is where the prices will have skyrocketed by as much as 20% a year, but have reached the peak of the cycle and in most instances overshot. This is obviously the worst time to buy because it’s Artificially overpriced.
- The Correction Stage is a long and slow period where prices decline. People often think of this stage as a price crash. However, the correction stage is usually a long and slow period where prices decline.
The whole property market cycle will generally take around 7-10 years. Preferably, you’ll see the prices of property double in one full cycle. However, the last cycle in Sydney took 12 years so it’s not an exact science.
Dwelling price declines in modern Australian history
The graph below shows declines in dwelling prices in Australia since February 1982. As the graph shows, dwelling price declines are a common occurrence. Australia has had seven in the past 30 years or every four years or so.
If you take a look at the current cycle for July 2017 (line in red), you’ll notice that it is actually the mildest cyclical downturn in modern Australian history. Even though it may still be a little early, this historically expected downturn is not too bad.
Property market segments
Here is another graph that shows the current Australian property market divided into four segments. Let’s focus on the top 25% segment which are the most expensive houses, the middle 50% segment is where the majority of the market is, and the remaining 25% of the market segment who are at the bottom of the graph.
As we can see, Australian dwelling prices for the top 25% are currently falling. Still, we can also see that the growth of the middle 50% is still moderate as well as the bottom 25% where the pace of growth is still healthy. The middle 50% and the bottom 25% property segments are doing fine.
Research done by Propertyology shows that regional locations are attracting people to move and live away from the cities which are generally where the middle 50% and bottom 25% are. As city prices increase and get too pricey, people move out further. This is quite normal.
Nonetheless, the top 25% of the market is declining enough to influence the total numbers and the headlines. If it weren’t for this segment, we would see a different set of overall Australian property market numbers. However, having said that there are pockets in Sydney where the extremely expensive homes are still doing really well. At the extreme levels, the market is more dependent on IPO’s and Stock Market forces rather than interest rates. When someone starts a business and floats it on the Australian Stock Exchange their wealth could go into the hundreds of millions and buying a $10 million or more home is quite common.
The bottom line is that there are different markets and to take advantage of the cycles you really need specialist advice.
If you need assistance with getting the right type of loan for your Australian property market investment, contact a Chan & Naylor accountant near you, and we’ll be more than happy to help.
Aside from Australian property investment loans, have a look at our other accounting and advisory services that we do to help you achieve greater success.
Chan & Naylor Group has national offices in North Sydney, South West Sydney, Sydney, Pymble and Parramatta in New South Wales, Melbourne, Moonee Ponds and Hawthorn in Victoria, Brisbane and Capalaba in Queensland, and East Perth in Western Australia that can assist you with your Australian property investment loan as any property tax or business tax enquiry that you may have. Contact us today.
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