Buying a rental property is generally considered to be a long term investment. However, for the astute investor, money can be made in shorter periods by diversifying your portfolio and learning to read the property cycle. Does that sound far-fetched? Baxton Property Management in Hobart takes a look at how the property cycle works.
It’s a given that you cannot hope to succeed in the property market unless you do your homework. You are using a sizable chunk of capital when you invest in rental property, so you want to know that you have bought wisely to maximise return on capital.
The property cycle phases
The property market will always rise over time, historically it’s risen by 10% a year for the last 100 years, but within each 100 years, there are cycles of roughly 7 to 10 years each. The critical consideration in making money over the medium term through property investment, is to pinpoint the right time in that cycle to take action – whether it’s to buy-to-let, or to gauge the right time to sell.
It is generally accepted amongst property investors and analysts that there are four phases to the property cycle. Different commentators have different names for them, but all agree on the characteristics of the various phases.
The Value or Stagnant Phase: In this phase prices are stable, and there is little movement in the market. Many consider this the best time to buy, and it’s definitely not the best time to sell. If you have capital available, this is the time to pick up good deals from desperate sellers. The only thing you have to be sure about is that the market has, in fact, reached the bottom. A canny investor will wait until prises start to rise slightly.
The Growth Phase: Prices start to rise, but not too quickly at first. The vacancy rate will start to fall and rent prices slowly start to increase. Investors realise the potential in the area and start to climb on board.
The Peak Phase: As more and more investors start to pile in, prices start rising a lot more quickly, in fact, prices can go up by 20% a year in this phase as has been happening in Hobart for the past year. It is normally quite a short phase. Supply starts to outstrip demand, as more and more investors try to cash in on the rising prices by selling their property.
The Correction, Fall or Slump Phase: Prices start to cool because of oversupply. Vacancy rates start to rise and rental prices start to drop, in an attempt to compensate for this. This can be very stressful for new investors that bought during the Peak Phase, which is the wrong time in the cycle to buy.
Additional factors that influence cycles
- Banks: The willingness of banks to write new loans can affect the property market. Obviously, they tend to tighten their lending criteria during the fall phase.
- Infrastructure: The announcement of a new infrastructure project like a mine, a dam or even a shopping mall, will stimulate the property market in the applicable area. A good source to gather information on any planned developments would be the local council or state website.
- Population Growth: If birth rates rise, it would be logical to assume that there will be a corresponding demand for housing in x number of years. The government provides information on population growth statistics.
- Interest Rates: Lowering the interest rate is a mechanism to stimulate economic activity and would indicate the end of the stagnant phase.
- Geographic Location: The whole of Australia doesn’t experience these phases at the same time. Different areas will be at different phases at different times. Investors should be sure to determine which phase the area they want to invest in, is experiencing.
Reading the property cycle correctly is very important when investing in rental property. The initial investment is huge, and constant upkeep can be an enormous drain on resources. Coming into the cycle at the wrong time can be disastrous. Baxton Property Management supports all rental property investors by providing specialist property management services.
Written and syndicated by
– Baxton Media.
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