{"id":165788,"date":"2024-05-10T19:30:15","date_gmt":"2024-05-10T09:30:15","guid":{"rendered":"https:\/\/propertyupdate.com.au\/?p=165788"},"modified":"2024-05-10T17:31:10","modified_gmt":"2024-05-10T07:31:10","slug":"australian-property-cycles","status":"publish","type":"post","link":"https:\/\/propertyupdate.com.au\/australian-property-cycles\/","title":{"rendered":"Boom to bust: What makes property prices rise and fall"},"content":{"rendered":"

We're now 16 months in to a new property cycle.<\/p>\n

Early in 2023 our housing markets reset, and property values started rising, despite the fact that the RBA kept raising interest rates.<\/p>\n

So what happened?<\/p>\n

What changed?<\/p>\n

And what does it mean for the future of our property markets?<\/p>\n

\"Property<\/p>\n

To help understand what\u2019s ahead and if the property markets will keep rising or crash as some are still suggesting, I will outline the dynamics and economics of Australia\u2019s property market, what causes real estate prices to increase in Australia, and how you can ensure your investment outperforms the market averages over the long term.<\/p>\n

How does a property cycle work?<\/span><\/h2>\n

\"01\"<\/p>\n

We all know that Australia\u2019s property markets move in cycles.<\/p>\n

Then each state has its own individual property cycle and there are further cycles within each depending on the area, price point, and even the property type.<\/p>\n

Historically, cycles start with a period of rising values, followed by a lull period where prices stagnate or even decline as vendors put more properties on the market for sale, before starting to increase again.<\/p>\n

While you\u2019ll often hear that property cycles last seven to 10 years, and while that may be the case for individual state property markets, the following chart from Michael Matusik shows that since 1980 the \"overall Australian property market\" peaked every 4 years or so.<\/p>\n

Of course, the length of an individual cycle varies depending on a combination of economic factors as well as supply and demand, rather than a period of time, yet it would appear that the time between peaks is getting shorter.<\/p>\n

This makes sense given the way we receive information these days and how fast news spreads.<\/p>\n

Gone are the days of a weekly or even monthly real estate report in the printed press.<\/p>\n

News is at our fingertips 24\/7.<\/p>\n

Quarterly house price growth reports have now morphed into daily indexes.<\/p>\n

\"43-year<\/a><\/p>\n

The property boom of 2020-21<\/span><\/h2>\n

While the Covid-19 pandemic shut down life as we knew it, many businesses closed and economies tanked, there was one market that flourished \u2013 our housing market.<\/p>\n

The pandemic years of 2020-21 saw a once-in-a-generation property boom driven by historically low-interest rates, pent-up demand, and a flurry of government incentives.<\/p>\n

In particular, 2021 was an extraordinary year for Australia\u2019s housing market - around 98% of locations around the country recorded an increase in the median property value, with many of those values surging by more than 20%.<\/p>\n

The Australian Bureau of Statistics (ABS) confirmed that the total value<\/a> of Australia\u2019s 10.8 million properties at the time skyrocketed to $9.9 trillion in 2021 alone, having risen by a wallet-busting $512.6 billion in just 3 months.<\/p>\n

Now these are some large numbers.<\/p>\n

At the same time, the collective wealth of Australia\u2019s homeowners increased by $2 trillion in that one year alone - a sum which was 30% higher than the annual output of the entire Australian economy.<\/p>\n\r\n\r\n

<\/div>\n

And a few emerging sentiment shifts also put pressure on prices.<\/p>\n

We saw the pandemic cause Australians to re-evaluate what they want from their home.<\/p>\n

Home was no longer just the place to rest; it fast became the place to work, play, and even self-isolate for a period of time.<\/p>\n

As a result, many buyers were looking for larger homes with more space\u2026 and were even prepared to move out, even to the regions, to get it.<\/p>\n

In fact, it was a cycle of property upgrades.<\/p>\n

Some tenants upgraded to become first home buyers; many millennials moved out of apartments and upgraded to homes as they started to consider forming families and other Aussies upgraded their homes for more space or to live in the right neighbourhood.<\/p>\n

At the same time, many Baby Boomers upgraded their lifestyle looking for high-quality, low-maintenance living, knowing this will likely be their last home while others bought themselves a holiday home.<\/p>\n

And the resultant significant rise in housing prices means most existing homeowners are sitting on substantial equity.<\/p>\n

But this was a very short property cycle.<\/p>\n

Downturn phase of the cycle in 2022<\/span><\/h2>\n

It wasn't long before we moved to the next phase of the property cycle.<\/p>\n

Australia\u2019s property boom ended in 2022, as prices soared and affordability deteriorated.<\/p>\n

For context, as you can see in the table below, property prices surged by around 26% overall and much more in certain locations, while wage growth rose a mere 2.3%.<\/p>\n

At the same time, inflation was soaring making it harder for buyers to save that much-needed house deposit.<\/p>\n

This table shows how the various property markets performed since the onset of Covid 19.<\/p>\n

\"Summary<\/a><\/p>\n

The property market reset of 2023<\/span><\/h2>\n

It's no secret that the Australian housing market has faced its fair share of challenges over the past couple of years but it's now clear the property market bottomed out early this year despite the fact that interest rates were still rising then\u00a0<\/span><\/p>\n

Of course house prices are driven by many factors, not just interest rates.\r\n\r\n

<\/div><\/p>\n

More important is consumer confidence and supply and demand.<\/p>\n

Currently, demand for housing is booming, driven by a surge in migration and the return of international students.<\/p>\n

The recently released National Accounts showed that Australia\u2019s population has grown by around 620,000 people in the past financial year.<\/p>\n

That\u2019s the highest number in history and a hundred thousand more than what the May federal budget projected.<\/p>\n

And these people all need somewhere to live.<\/p>\n

This increase in population is competing with locals in the rental market, driving rents higher and spilling into property prices.<\/p>\n

In contrast, the growth in dwelling supply is lagging, with building approvals for new homes at a decade low.<\/p>\n

And despite some commentators predicting property prices would plummet by 15, 20 or even 30 per cent based on rising interest rates, the Australian property markets have shown remarkable resilience.<\/p>\n

While the cash rate can be a good short-term indicator of price growth, other factors \u2013 including population growth and supply of dwellings to market \u2013 have had a more significant impact on dwelling values.<\/p>\n

Until supply responds to demand, the upturn seems likely to continue.<\/p>\n

So what has happened to property values in the long term?<\/span><\/h2>\n

Research by Metropole, based on data from the REA Group and the Australian Bureau of Statistics (ABS) shows that Australia\u2019s national median house value has risen by an enormous 540.1% over the past 42 years.<\/p>\n

This is an average annual growth rate of 7.62%.<\/p>\n

The numbers did, however, vary by state.<\/p>\n

\"40<\/a><\/p>\n

 <\/p>\n

Over the past 42 years, Melbourne had the highest average annual price growth for houses at 8.26%.<\/p>\n

Sydney was the second-fastest-growing with a 7.98% average annual house price growth, only just ahead of Canberra which enjoyed a 7.9% increase.<\/p>\n

The average annual house price grew 7.51% in Brisbane while Adelaide and Perth saw 6.94% and 6.26% increases respectively over the 42-year period.<\/p>\n

There were no 40-year figures for Hobart and Darwin but the 30-year average annual house price growth was 7.29% and 5.84% respectively.<\/p>\n

Of course, these are just overall averages and within each state here are some locations that have enjoyed significantly more capital growth than these averages, and other locations which have underperformed.<\/p>\n

I guess that's how averages work.<\/p>\n

At Metropole<\/strong>, we spend a lot of time researching locations that deliver wealth-producing rates of capital growth.<\/p>\n

However, as you can see in the following chart from financial analyst Stuart Wemyss <\/strong>of Prosolution Private Clients<\/a> each state and territory runs its own property cycle dependent on it's own economic cycle.<\/p>\n

This chart shows that while \"the overall\"Australian property market peaks every 4 years or so, States tend to have much longer periods between cycle peaks and these are often followed by long periods (often many years) of flat or no price growth.<\/p>\n

This chart illustrates that property markets have moved in two distinct cycles over the past four decades, being either in growth phase or flat parts of the cycle.<\/p>\n

However, over longer periods of time, property capital growth is relatively stable - most markets have produced circa 7.50% p.a. growth over the past 40+ years (which is approximately 5% p.a. plus inflation).<\/p>\n

\"Median<\/a><\/p>\n

 <\/p>\n

This leads to the question\u2026<\/p>\n

What causes property values to increase?<\/span><\/h2>\n

OK - so now that you know all about property market cycles and at what stage in the cycle we\u2019re currently in, let's talk about property price rises, and how and why they grow.<\/p>\n

I\u2019ve divided this discussion into:<\/p>\n