The 3 key Things You Should Know About Property Cycles

by | Oct 14, 2022 | Investments, Buying Your First Home, Managing Your Mortgage

The 3 key things you should know about property cycles

Phew! What a roller coaster ride we are on! We rode to record high house prices late last year and are now careening (trundling?) down the other side, bracing ourselves for impact, unsure of when exactly we’ll reach the bottom.

If you’re following the news, or even just popping your nose in now and again, the headlines can feel startling. “House price drops over six months ‘biggest on record’” shouts Stuff, while the New Zealand Herald exclaimed, “ House prices dropping $322 a day: Real Estate Institute figures out for August.”

How this news is making you feel will likely depend on which side of the property fence you’re sitting. If you’re looking to sell, a drop in house prices may mean you won’t get quite the capital gains you were hoping for. But those looking to buy could pick up a bargain. Relative to last year at least.

For the rest of us, us smug homeowners who are quite happy where we are, or those who have no intention of buying, we’re probably finding those headlines a little easier to ignore.

Regardless of whether you’re in the market or not, it’s good to be aware of what a property cycle looks like, and what that may mean for your investment.

So, what should I know about the property cycle

1. There are 4 key stages to a property cycle.

The peak
This is what we experienced in November 2021, house prices were at their highest, buyer demand outstripped supply and houses were selling well above their asking price (and often their CV).

The downturn

This is probably where we are now. House sales are slowing, prices are dropping, the media is having a field day.

The trough

The trough is a period of stability between the downturn and upturn. House prices aren’t dropping any further, but they’re not rising significantly either. 

The upturn

But, that trough won’t last as people regain confidence in the market and buyers return – once again pushing up demand and prices, inevitably bringing us back to a peak.

2. The factors that influence a property cycle

Of course, a property cycle doesn’t happen in a vacuum. The soaring heights of last year can be attributed to factors like the OCR dropping down, meaning mortgage interest rates were low, and houses felt more affordable. And on top of this, demand well-outstripped supply, which always has a funny way of pushing up prices.

So what factors can influence a housing cycle?

  • The general economy – if the economy is going well, this bolsters consumer confidence that their own wealth will increase and therefore the ability to afford property
  • Interest rates – lower interest rates make housing seem more affordable, even when prices are high
  • Government policies – things like the LVR (loan to value ratio) and CCCFA have impacted who can borrow and how much
  • Consumer confidence – and their optimism about the state of the market
  • Demand – high demand can increase prices if it outstrips supply, and conversely, when demand drops, so do house prices as sellers need to meet where the market is

Of course, this isn’t an exhaustive list, and many other factors can contribute to a housing boom or bust. 

3. What this means for you

Where we’re at in the housing cycle will have a different impact depending on where you are on the property journey.

The lower end of the property cycle – so during the downturn and the trough – tends to be more favourable for buyers. While there’s a lull in house prices, buyers may not need to borrow as much or are able to afford a better-quality home.

As we go back into the upturn and towards that peak, however, this is where the sellers have their moment in the spotlight. As demand increases, so does the value of property and the amount you’ll potentially pocket when you do sell.

However, whether you’re a buyer, seller, or holder, where we’re at in the property cycle shouldn’t factor significantly into your buying or selling decisions. If you can afford to buy, and it fits in with your financial situation, there’s no reason not to buy during a peak, and if you bought your home 20-years ago – or even only 5 – while  house prices may be dropping a little now, the value of the property has probably increased significantly during that time.

After all, the average house price in 2018 was $670,000, while the average house price today is sitting at around $970,000.

As long as you’re buying within your means, and your finances stack up to being able to hold the property long term, there is no right or wrong time within a property cycle to buy – whether that’s a home for you to live in or an investment property.

To learn how the current mortgage market relates to the property cycle join our online webinar featuring Hannah McQueen and JB (from Squirrel Mortgages) on Tuesday the 18th of October at 7pm. They’ll give a quick overview of where mortgage rates are at and where they can be expected to go – and answer any questions you may have about the mortgage market. Register to attend here.

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