Source: Domain February 2023
It’s almost impossible to avoid the sensational stories of boom and bust as the Australian property market shifts through a price cycle.
But what drives the property cycle, and how can buyers and sellers capitalise on the cycle’s different phases?
What is a property cycle?
A property cycle starts with a boom, when prices and demand are high amid limited supply.
The boom is typically followed by a downturn, which can happen due to an oversupply of properties in the market, a reduction in borrowing capacities, or a combination of factors. In this phase, prices may fall, and demand is low.
With fewer buyers in the market, prices start to level off or fall – this is known as the stagnation or stabilisation phase.
Slowly, the property market starts recovering and more investors and buyers start entering the market, which is the upturn phase that leads to the next boom: the start of a new cycle.
Dr Nicola Powell, Domain’s chief of research and economics, says “And what you tend to find is the contraction phase or when we see prices decline, it’s normally shorter and less severe than the upswing that preceded.”
What drives a property cycle?
There are many different drivers says Powell, with population growth, interest rates, the availability of credit, tax and policy settings, health crises, big spending from federal government on infrastructure and buyer incentives all in the mix.
The duration of each phase of a cycle can vary widely, reflecting a range of socio-economic factors, with history showing both short, sharp upswings and long, drawn-out periods of growth.
Media headlines often talk about the property market as if it were a single market, but while general in nature, this coverage can still be useful when combined with analysis at a more local level.
Talking to real estate agents or buyer’s agents can be helpful because they’re “on the ground” and can provide insight into what’s actually occurring as opposed to what you’re hearing in the news.
How understanding property cycles can help your property decisions
While buying low and selling high has long been the dream for property owners, it’s difficult to predict how long each phase of a property cycle will last, and therefore difficult to “time the market”.
“When you look at the price cycle overall what it tells us is it’s not about timing the market,” says Powell. “It’s actually time spent in the market that counts.”
There are some great advantages to buying during the slump and stagnation phases. One of the big advantages of buying in these phases is that you do not have the normal competition and you can often purchase a property at a much lower entry point. Most people wait too long for the signs the market is in an upswing and often when they decide to enter the market it is too late as FOMO has taken over and the competition for properties is fierce.
Based on what we are seeing on the ground there are many indications that the bottom of the market was late last year. There are large numbers of people that are inspecting property and given the lack of supply this is putting price pressure on properties, particularly A grade properties.
This month we provide some insights into the market, property management update, some recent purchases and provide a tip on what an A, B, C & D grade property looks like.
Source: Corelogic February 2023
CoreLogic’s national Home Value Index (HVI) fell a further -1.0% in January, a slight improvement on the -1.1% decline recorded in December, and the smallest month-on-month decline since June last year. The reduction in the rate of decline was evident across most capital cities, except for Adelaide (-0.8%) and Perth (-0.3%) where housing values have held firmer since interest rates began rising in May. CoreLogic Research Director Tim Lawless said although the housing downturn remains geographically broad-based there are signs some momentum has left the housing downturn.
Each month the CoreLogic Research team puts together a Housing Chart Pack, with all the latest stats, facts and figures on the residential property market, such as the combined value of residential real estate, sales volumes, and the trend in new listings.
Here are this month’s highlights*:
- The combined value of residential real estate in Australia fell to $9.2 trillion at the end of January, from $9.3 trillion in the previous month.
- Dwelling values in Australia are -7.2% over the past 12 months, marking the largest annual decline in home values since May 2019.
- January saw national home values decline -1.0%, which is less than the -1.1% fall in December, and below the peak monthly decline (-1.6%) recorded in August.
- The highest annual growth rate in dwelling values among the regional and capital city dwelling markets was across Regional SA, at 15.3%. The lowest change in values was across Sydney, where home values declined -13.8% in the past year.
- Sales volumes continue to trend lower as buyer demand slows. CoreLogic estimates that in the 12 months to January, there were 500,550 sales nationally, down -19.1% compared to the previous year. While down compared to last year’s volumes, sales estimates are still 4.6% above the decade average annual sales volume.
- At the national level, properties are taking longer to sell. In the three months to January, the median days on market was 37, up from a low of 20 days in the three months to November 2021.
- Similarly, vendor discounting has also expanded from -2.9% in the three months to November 2021. In the three months to January 2023, the median vendor discount at the national level was -4.3%.
- In the four weeks to 8 January 2023, the volume of new listings totalled 13,936 nationally. The new listings trend is moving through a seasonal low, and is also -22.1% lower than the previous five-year average.
- The combined capital cities clearance rate was 61.8% for the week ending 29th of January. While this was a much stronger result than in the final weeks of 2022, the volume of auctions was still moving through a seasonal low. As volumes rise in the coming weeks, this will prove a more substantial test of the strength of the auction market.
- Annual growth in rent values eased slightly in January to 10.1%. Annual growth in Australian rent values recently peaked over the 12 months to December, at 10.2%. The unusually high growth in annual rent growth has partially been driven by growth in unit rents across Sydney, Melbourne and Brisbane, where rents have increased around 14-16% annually.
- Through January 2023, Australian gross rent yields rose to 3.9%, up from a recent low of 3.21% a year earlier. This is the highest rent yield since November 2019.
Property Management Update
The Melbourne rental market has certainly seen a shift in both weekly rental pricing as well as vacancy rates.
The team at Buyers Advocate Property Management are finding that the current rental market is moving faster than we have seen in a number of years. While this is exciting news for our rental providers it can be challenging when renegotiating existing leases to be definitive on what the market would be prepared to pay without testing the market.
We are assessing each property on our portfolio ensuring that we take several things into consideration when assessing for a rental increase / lease renewal offer. We look at tenure of the renter, how well the property is being looked after, if rental payments are on time as well as what the current rental market is indicating price wise. As we are only able to increase rents every 12 months, it is important we get this as close to market value as possible as our ultimate aim is to maximise the rental providers return, yet maintain and secure the best renter for the property.
For properties whereby the renter is vacating we are finding properties are leasing quickly, generally after the first open home. At Buyers Advocate Property Management, we act on applications as a priority, sending prospective renters details to our owners as soon as received. We have a quick turnaround time for processing and sharing and urge our owners to act on this with sense of urgency. As the rental market tightens, renters are applying for multiple properties at one time, we need to secure good renters as quickly as possible.
If you are unhappy with the level of service you are receiving from your current Property Manager, have a chat to Rachel or Liz. It may be time for a change. If you would like a confidential chat, please contact us (03) 9818 4499.
Although supply has been very low we have continued to deliver great results for our clients. Here are a few below:
1st Home Buyers – Richmond
Purchased the weekend after the Australia Day and one of the first Auctions in Melbourne for the new year. With no future clarity on what “the market will bring” in 2023, a crowd of 40 plus gathered within the internal courtyard of the block, to see what and how this Auction, would transpire.
With a quoted range of $850,000- $900,000, Buyers Advocate opened the bidding with an $800k offer. From here, we saw 4 other punters coming into the mix, until the $900k mark. As the property was placed “on the market at $910,000” on Buyers Advocate’s bid, it was down to one other party, to compete. A couple. With the couple constantly referring each bid to one another as the bidding climbed, Buyers Advocate knew, based on body language, the competing couple wouldn’t have much more in the tank. This was proven correct when Buyers Advocate had the property knocked down to them at only $21,000 over the vendors reserve and exceptionally well under their client’s expectations.
Home Buyer East Melbourne
With the client only engaging us two days prior to this deal, our clients needed help in securing their well-located dream home. With two other offers already made on the property by other buyers, Buyers Advocate had to swing into action with haste. After a few phone calls backwards and forwards whilst asking the pertinent questions of the selling agent, Buyers Advocate had things tucked away squarely, to achieve the desired result. With the vendor signing off on the Buyers Advocate offer that was in line for their own circumstances, Buyers Advocate’s client, now has a new place to call home.
Home Buyer – Regional Victoria
Secured through swift, thoughtful negotiation built on professional Agent relationship. Purchased for well under asking price for our delighted client.
Tip Of The Month:
Know what an A, B , C or D grade property is
Even wondered what it means when a real estate professional refers to a property as being an A, B, C or D grade property?
A-grade properties are not necessarily located in the most expensive suburbs. One thing they all have in common is that they have a large depth of buyers who want to buy them, regardless of what stage of the property cycle we are in. They also have scarcity value. This can be driven by location, access to amenities and schools, quality of the property, investment in the area and what the demographics in the area demand.
On the other hand with a B-grade property, there may be some compromises, for example quality of the property. But these can provide some great opportunities if there are solutions to move this property to an A grade property. For example, a future renovation that solves the issues.
A B grade location may also become an A grade location if it is going through a gentrification process or is a neighbouring suburb to a blue chip location.
C grade properties are those whereby there is not the same demand and there is unlikely to be going forward, for example being located on a busy through road or having an impractical floor plan that can not be resolved. But even in these instances you need to be aware of the changing demographics and what people demand. For example in some locations a busy road may not be a deal breaker. Some people are happy to consider a busier location if it gets them in a particular school zone for example. Also for some properties they may have really good access and the property may be well screened from any road noise.
D grade properties are ones that are poorly positioned in bad areas and have next to no prospects for future appreciation. For example being located next door to an industrial precinct. They can also be in pockets surrounded by undesirable dwellings such as commission housing, commercial areas or high-density growth zones.
When the property market is in a growth phase you will see A grade properties boom as FOMO takes over and even in a downcycle they are still likely to perform well given the underlying demand.
If you buy an A or B grade property you are setting yourself up to accumulate great wealth through property. However only 5% properties are true investment grade options and it takes great experience and knowledge to identify these. So if you need professional help make certain you seek it!