Understanding Property Cycles

UNDERSTANDING PROPERTY CYCLES
How to make money in booms and slumps The importance of timing in real estate investment.
By Michael Yardney Director, Metropole - Property Investment Strategists
Understanding Property Cycles
Copyright 2003 - 7 Michael Yardney

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About the author
ichael Yardney is a successful Melbourne based property
developer and property investor. As director of Metropole Property Investment Strategists, his opinions as a property commentator are highly sought after and frequently quoted in the press and on radio. Michael is publisher of Australias leading monthly property investment emagazine Property Investment Update with well over 25,000 subscribers. He is author of the best selling property book How to grow a multi million dollar property portfolio in your spare time and co-author of All you need to know abut Buying and Selling your Home with Pamela Yardney.
He bought his first investment property in his early 20s without a deposit and not understanding the rules of the game, and then went on to build a multi million dollar investment property portfolio in his spare time. He then became a property developer and grew this portfolio in quantum leaps. Michael and his team at Metropole Property Investment Strategists have bought, sold, advised, invested in, negotiated for, developed, built or project managed hundreds of million of dollars worth of property to create wealth for their clients. Michael is regularly engaged to be a keynote speaker at conferences and seminars throughout Australia and SE Asia. Many people consider Michael Australias leading expert in developing financial independence through property investment. ------------------------------------------------------------------Super Successful Property Investors dont become rich not because they do certain things, but because they do things in a certain way. In this series of 7 CDs learn for Australias top property experts as they give you the wisdom of their advice in one-on-one mentoring sessions:
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The Crowd is always a Day Late Understanding Timing

Timing: The Right Minute can save an Hour
Youve probably done this at a football match, a concert or any big event. I know I have! Just as the event is about to finish, I have headed for the exit a minute or two before the end. And because of the sixty second head start, I have ended up at home half an hour earlier than if I would have waited a few seconds longer to leave. Those few seconds have put me in the car park ahead of the crowd, so that instead of having to work my way through a traffic jam, I was able to whiz home quickly on uncluttered roads. I have done this hundreds of times and saved countless hours, which I have put to better use. Whenever I have to drive into the main Melbourne CBD, I try and avoid the peak hour traffic, and find I can make the journey in half the time that it would take if I left when the main crowd was going to work. I always try to be a few minutes ahead of the crowd, or if I cant, a long way behind it.
Timing is everything.
With investing and particularly with property investment, timing is also really important. It is one of the keys to financial success. Have you noticed how the beginning investor will often wait until the market moves before buying property or shares? The reality is that by the time the beginning investor is aware that the market has moved the experienced investors have already moved the market to the next level. So, how do they do this? Well. the experienced investors tend to buy properties before the market starts to inflate and prices go up. They do this by understanding the concept of cycles in property as well as the investment world. They understand the investment clock, which is based on the wellknown phenomenon that business cycles occur, on average, every seven to nine years. Many investors have trouble coming to grips with the probability that events can turn out in a cyclical fashion. However, history indicates that the probability is very high indeed. One of the few things that history has taught me was that history repeats itself. The sooner you, as an investor, live through an investment cycle, and see the recurring nature of booms and busts in property and in other investments, the sooner you will become a better investor and understand the importance of timing of your investment decisions. I consider understanding timing of the property cycle and the investment cycle in general, one of the most crucial lessons a property investor can learn.
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The correct timing of your investments can either make you or break you. By the time the main crowd are buying property investments, the main hike in prices has already occurred. As most property investors purchase property to hold for the long term, you may think that this timing doesnt matter, but poor timing can force some investors to sell their properties. This tends to occur when they purchase a property near its peak prices at the height of the property boom. I have seen this occur frequently lately. Invariably they have bought a negatively geared property a few years ago and are now feeling the strain of the monthly shortfall between rental income and their mortgage. This combined with the bad press property receives at the depth of the property cycle plus the fact that the value of their property is not increasing rapidly makes them doubt their investment decision. In general they are too impatient to see the fruits of their investment and this causes them to sell at the wrong time. Such as now when the market is slow or before they have held the property long enough to see serious capital growth. These investors often take on more debt than is safe, not keeping their borrowings to a manageable level. Then as interest rates rise (which tends to happen in the next stage of the cycle, as you will discover later in this section), they have difficulty coping and start panicking and sell the property, especially as they have seen no profit growth in the short to medium term. It may take the market seven to ten years to run the full cycle and if you purchase in the wrong point in the cycle, it will take a number of years for you to get your purchase price back. This can clearly be seen from the following discussions I had with two friends a few years ago. Both were professionals who had bought their homes quite a few years ago. Yet both had different views on the benefits of buying property as an investment. Both stories relate to my friends family homes and not investment properties but the lessons are there to be learned. Their views were so different that you would wonder if they were talking about the same thing.
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Danny, a solicitor, was a partner in a large city law firm. In the late 1980s the practice was booming and many of his clients were making a fortune out of property developing and speculating. Danny was doing very well from all the legal work for his clients and he had even made a tidy sum by being a silent partner in a few small development projects. In late 1988 both he and his wife felt that they would like to move into a new house. They had bought their family home about seven years earlier at an excellent price earlier from a builder who was in financial problems. Now that property prices had risen considerably, they had built up quite some equity in it. Danny and his wife fell in love with the first house that they inspected in the prestige Melbourne suburb of Toorak. It was architect designed, had a swimming pool, which was ideal for their two boys and had been featured in Vogue. In fact that issue of the magazine, opened to the appropriate page, had been left on display on the coffee table when the house was open for inspection prior to auction. At the auction they had a long bidding war with a couple of other keen purchasers and eventually bought the house for $930,000. This was $80,000 more than the limit they had set for themselves, but they were comforted by the fact that there were a number of other bidders willing to bid almost as much for their dream house. Well.Danny and his family loved their new house and enjoyed the pool and the nearby park where they would frequently walk the dog. When the recession hit in the early 1990s and property prices started to drop and solicitors incomes started to decline, Danny started to have a little difficulty meeting his mortgage repayments. He considered selling the house, but when agents advised him he would probably only get around $800,000 for it, he just kept paying the monthly mortgage payments to the bank. In 1993 when interest rates dropped from the highs of the late 1980s Danny refinanced his house. His plan was to keep up the mortgage payments until the value of his house returned to its previous level and then he would decide if he would sell it or not. In 1996, when his 3 year mortgage term expired, Danny again tried to sell his house, but the best price he achieved at auction was $650,000. He could not accept this price as it would mean he would have lost well over $300,000 in capital value from his house (considering the initial purchase price and purchasing costs) and his six years of mortgage payments would have all gone down the drain. Danny kept his house on the market for over a year with various agents, but did not get any offers that he would accept. When I spoke to him in late 1998, he had just sold his house for a price close to $700,000 and was moving into a rented house with is family. He explained how much he had lost over $250,000 in capital over the 10 years that he had owned his house as well as all the mortgage payments and all the rates and taxes. He was sure that property was a bad investment and felt that he would be better off renting a house for the rest of his life and leave all the troubles of property ownership to his landlord.
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Contrast this to the story I heard from Michael, a successful ENT surgeon only a few days after Danny had cried on my shoulder. He had also bought his family home in the suburb of Toorak, but he bought his in 1993, about 4 years after Danny. I was visiting my friend Michael because I had an ear infection and as usual the topic of conversation turned to real estate investment as he new my interest in the subject. Michael explained to me that he was keen to buy some more property investments as he was buoyed by the huge capital gain he had made from the family home he bought in Toorak. He reminded me that when he bought the house in was in the middle of the recession we had to have when property prices were low and nobody was keen to buy luxury hoses. He had to spent about $100,000 improving house, but it was now was worth about $2,000,000. Almost double what he paid for it five years earlier! He told me that agents regularly approach him with buyers keen to purchase his house, and how pleased he was that he had the courage to buy his house when no one else was interested in luxury property. He admitted that today he couldnt afford to buy into the luxury suburb of Toorak if he hadnt taken those brave steps to go against the crowd a few years earlier. So what was so different about these two property purchases? They were similar priced homes in what most people would class a top location. Yet Danny had lost hundreds of thousands of dollars and Michael had made close to one million dollars. The difference was the timing. Danny had bought at the top of the boom, when prices were at their peak. In fact he probably overpaid for it at the time and its value has still not reached its previous high levels of the late 1980s. On the other hand, Michael had bought his house after property prices had dropped 40 50%, at the depths of the recession. Since then others have seen the intrinsic value of similar undervalued houses and pushed up property prices allowing Michael to sit on (or sleep in) a huge unrealised capital gain.
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The Property Cycle

Although most real estate agents and many books refer to the average annual compound growth of property as 10%, it is NOT constant each and every year. Property values tend to rise in cycles. In some years there will be no growth or negative growth. A simplistic version of the cycle goes something like this As populations grow there is an increased demand for property and this causes an increase in rents. Slowly this causes property values to increase because financial returns have increased. Builders and developers hop on board and start constructing new dwellings as property developments become more profitable. Over time this leads to an oversupply of property which eventually results in rent reductions and slumping property values. Yes, despite what many agents will tell you, property values may fall and often have. Then in other years, values may rise by over 20%. Putting a timeframe to these cycles is not easy. Lets have a look at the following graph which shows the annual growth of the Australian property market each year since the early 1980s.
A number of peaks can be seen in property growth followed by years of lesser growth and occasional years of negative growth (1983 and 1991.) Property growth peaked in other words we had property booms in the following years: 1981; 1987; 1994; 2003 As you can see cycles in Australia have generally lasted about seven to nine years. That is, property booms would occur about every seven to nine years. .
Michael Yardney www.PropertyUpdate.com.au Page 8
But these cycles do not exist because a number of years have passed. They occur because of a combination of factors and influences such as the state of the economy, social and political issues. Looking at the graph below, it shows that over time property prices increase (green line) and in good locations property values double every 7 to 10 years. At some stages of the cycle property values increase and they stay flat or decrease at other times during the property cycle, but ultimately they have a long term increase in value as depicted by the green line.
At various stage in the cycle property values exceed this underlying long term trend (such as in boom times) and at other stages fall short of this long term underlying value such as during property slumps.
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History shows that the property cycle consistently passes through 3 phases:
UPTURN
BOOM
SLUMP
The BOOM PHASE This tends to be the shortest phase of the cycle. During the boom property prices increase rapidly often by up to 20% per annum. The boom often begins slowly as investors recognise that property returns are increasing with increased rentals and slowly increasing property prices. As the boom continues a whole generation of new investors come in to the market driven by property seminars, the press, TV shows and the like. Greed starts to kick in and much speculation occurs at this stage of the cycle. This was evident during our last property boom when many investors bought properties off the plan. They hoped to on sell their properties at a profit and never intend to settle because often they didnt have the means to settle these properties.
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The SLUMP PHASE This is often characterised by an oversupply of properties due to the over exuberant activity of builders and developers. This causes increasing vacancy rates and decreasing investment returns. Property prices stop growing and in some cases drop. If there has been a prolonged boom phase, this is usually followed by a longer and deeper slump phase with a greater likelihood of property prices falling. During the slump property is out of favour in the media and investors often struggle with decreased cash flows, higher interest rates and stalling values. They often consider selling their properties. When they do this in a falling market with few buyers, they exacerbate the slump. The UPTURN PHASE This phase creates great opportunities but these are not usually easily recognised by most investors. During the upturn, vacancy rates slowly fall, rents start to rise, and property values start to rise slowly at first. By the middle of the upturn property is generally affordable and returns from property investment are attractive. Investors begin to enter the market. In particular professional investors take advantage of the opportunities of the upturn phase, but beginning investors are not yet convinced that property is a good investment. This is the time that many builders and developers buy properties and commence development projects to have them completed by the late upturn or boom phases of the cycle. At the beginning of the upturn phase of the property cycle interest rates are usually low and it is easier to get finance. Investors slowly get back into property as conditions seem more favourable. They see property values increasing and are concerned that they may miss out if they dont buy a property. This is also the time that many first home buyers enter the property market. At the end of the upturn phase of the property cycle real estate prices have risen substantially and property is becoming less affordable. As prices rise investment returns decrease. They usually increase gently (usually less than 10% per annum) and do not rise sharply until the boom phase of the cycle.
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Counter Cyclical Investing

Understanding the recurring relationship between the different stages in the property cycle is critical if you want to maximise the return on your investment dollar, with the minimum of risk. Just like leaving the car park of the football match a little ahead of the crowd, if you know where things are heading in the property cycle and you buy property before the crowd does, and before prices start to rise, you are likely to make big profits. This type of investing is called counter cyclical investing. Another way of saying this see what the majority of people are thinking and then consider the opposite as to where the truth may be found. This system of investing is certainly not fool proof, but it has served me and many other professional investors well over the years. It is an example of the crowd being wrong the majority of the time. Most people would rather not put themselves in what they feel is a hight-risk position. We all try and avoid situations that make us uncomfortable, physically, socially or financially. So the crowd always tends to wait until they think it is safe, based on popular opinion on what the majority is doing. This is the way most people think before they invest in property or in shares. But waiting that long means that the crowd is always late. The crowd misses out on making the big money. Whats more the crowd will always be late because that is how human beings are. They want to be safe. This is because of the phenomenon known as herd mentality or market sentiment. Leading articles in magazines like BRW or Personal Investment or the Sunday papers are a good barometer of what the crowd is interested in or market sentiment. This is because it is the job of the media to report what people are interested in and what they are talking about. Theses magazines tend to be consistently wrong, however, they are good indicators of a change about to occur. Remember if everybody owns something, there are no buyers left. You need buyers to keep pushing the price up or at least keep it where it is. Now I am going to seemingly contradict myself. While I advocate the concept of counter cyclical investing, precision timing is not really necessary with property investing. While it is important to know where you are in the cycle, it is also important to get going with your investment program. There are some properties that you should consider buying, even at what might appear to be the wrong time of the cycle. In other words the economy might be doing poorly and getting worse day by day, and you could still do well on a specific income earning property.
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You must consider each deal and its cash flow position and its potential upside, on its own merits. Of course the best time to by a property would be right at the bottom of the cycle, but remember the top and the bottom are only 2 days out of the whole cycle and you just cant pick them. The financial wizards, the economists, the PhDs usually cant pick them either. When I stared investing I didnt know anything about cycles. All I knew was that I needed to get going and I needed to start making money. Sure it would have been great to buy at the bottom of the cycle, but it isnt critical to buy right at the bottom if you find the appropriate deal. Looking back now, when I started my investment career, if I would have waited for the bottom of the cycle, there would have been so much pessimism in the press and in my discussion with friends and family that I probably would not have taken that first step. When investing in property you have to take action some time, you cant eliminate all risks. This is because when all risks seem to be eliminated, when it seems like ideal timing, its probably too late, the market will have already moved. You see the majority of people are echoing the same sentiment and the majority are generally always wrong or it is too late!
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The Investment Clock

To help you understand the cyclical nature of property values, it is also important to understand the investment clock and how general economic cycles work. The investment clock was first described in the London Times Newspaper over one hundred and fifty years ago and it is still relevant today. It helps you know when to invest and what are the best performing assets at a given point in time. While the investment clock is not a good tool for predicting the timing of economic tends with great accuracy, its real value lies in its ability to depict the cyclical relationship between the share, property and fixed interest markets and the order in which they occur. The clock tells you the most appropriate investment medium, considering the prevailing economic indicators such as interest rates, commodity prices and inflation. It shows that the share cycle is followed by the real estate and then the fixed interest cycles. The investment clock has proved accurate in reflecting the market forces that drive the various investment cycles. And the order in which they occur.
Twelve o'clock is the boom when a rapid increase in the demand for real estate results in property prices rising. Often property prices rise by 20% per annum during these boom years. As borrowing primarily funds property purchases, this increased demand for funds causes the cost of funds that is interest rates, to rise. As interest rates rise, companies find it harder to make profits. This together with the fact that the booming property market and
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fixed interest investments seem more attractive causes share prices to fall or at least stagnate. As property prices tend to boom at these times and because interest rates rise, the rapid growth of the property market cannot be sustained for more than a few years. Property prices stagnate and even fall. At about 3 o'clock in the investment clock, the share market is usually doing little and offers few prospects for investors and interest rates are too high to make borrowing for property an attractive option. This is the fixed interest or cash part of the cycle when cashed up investors can take advantage of the high interest rates on offer to lenders by way of bonds, debentures and cash deposits in financial institutions. Other investors just try and battle on paying more interest on their borrowed funds. High interest rates slow the economy and lead us into the recession. This brings us down to six o'clock, in the depths of a recession or downturn and Australia has a downturn of varying magnitude every seven to nine years. Now investors are either too scared, or cant afford to borrow money and in time interest rates slowly start falling. Also during these times companies are forced to become leaner and to increase productivity. These measures and the slowly improving economy translate into increased company profits and this gradually stimulates share prices to recover. We are now at about 9 o'clock. At this point in the cycle many new investors start to buy shares wanting to get in on the boom. Eventually the point is reached where the companys earnings or net asset backing cannot justify share prices and a sudden correction in share prices occurs. With the share market losing its glamour and with interest rates being low many investors now turn to the property market and real estate prices again start to rise. And once again we find ourselves at twelve o'clock.
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Why Do the Cycles Keep Occurring?

You may well ask - why do property and economic cycles occur in the first place? Why doesn't our market driven economy find a nice equilibrium? With regard to the general economic cycle, the simple answer is that the world economy is a collection of many nations each at their own individual point of the economic clock. And each nation is made up of millions of people like you and me, each making their own financial decisions as a reaction to, or in the expectation of, other people's decisions. The sheer momentum of all these economies means that they always over swing the mark, resulting in cyclical economic movements. So if economic cycles are well understood and the benefits of being a counter-cyclical investor are evident, why doesn't everyone make a killing? The simple reason is human nature. Two factors drive the markets like the property and share markets - greed and fear. Every 7 - 10 years or so there is a new generation of people who have grown up and havent had the opportunity of learning the lessons of history, and therefore the cycle goes on. It is much the same for the property cycle. As the property values rise, people read about prices rising and see their friends buying properties, either as investments or family homes, and most investors want a piece of the action too and also buy properties. This drives the prices up and leads to further buying. This is the beginning of a property boom. The banks and finance companies tend to lend freely at these times. They decide how much they are prepared to lend on investment properties based on their valuation of the property and the borrowers ability to make the necessary loan repayments as a percentage of their income. Typically banks let people pay 30 35% of their disposable income towards mortgage repayments. In the early stages of a property boom interest rates are low and this makes repayments more affordable. As more investors enter the market, banks tend to vie for their business, that is try to lend them money, and one of the ways they do this is to go beyond their normal lending guidelines and allow investors to borrow to the outer limits of their comfort zones. It is hard for people to resist the temptation of doing what everyone else is doing and they extend themselves to buy investment properties or their first or a bigger family home. As the cycle moves on and interest rates rise, some investors have difficulty meeting their mortgage repayments and this is when a crash is looming.
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As investors or homeowners find difficulty keeping up mortgage payments (remember the story of Danny at the beginning of this report) they try to sell their houses. Now there are fewer buyers in the marketplace and prices are falling. These investors now have to decide whether to sell their properties and face a capital loss or try and hold on and keep up the repayments. As the cycle moves on prices stagnate or fall and. it can take a number of years for property values to again reach their previous peaks Most investment advisors recommend buying real estate and holding it as a long term investment, suggesting that time will make up for the ups and downs of property values that occur over a cycle. This is true, but as you could see from the stories of Danny and Michael, you can make much greater profits by careful timing of your property purchases. Remember the golden rule that the profit in any property investment is made when you buy the property. You would think that people would learn from history, but this appears not to be the case. Human nature drives us to do what everyone else is doing when everyone else is doing it. Buying property when no one else is requires confidence, but it may be easier if you remember that only 1% of investors achieve financial success. Do you really want to be part of that crowd?
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How Property Cycles Develop

But why do property prices rise so much at certain times and fall at others? And why are the cycles different in different states at the same time. If one looks back over at the year 2000, prices rose strongly in Melbourne and didnt have an equivalent rise in Sydney. Much the same happened in the 80s. Prior to the boom in Sydney in 1987, there was a long period where the Sydney market was relatively flat after the previous boom, which peaked in 1980. By contrast Melbourne, a city about the same size as Sydney, affected by the same interest rates, the same tax laws, the same federal government, and all the other contributing factors politicians might create, after coming out of the 1982/83 recession, literally doubled in value over the following two years through 1984/85. At the same time the Sydney market, was almost dead flat. So of the two largest cities in Australia, subject to all the same environmental and economic conditions at the time, one doubled in value, the other did almost nothing. Take the last couple of years since the property boom of early this decade finished on the east coast in late 2003, the Sydney property market slumped, the Perth and Darwin markets boomed and most of the other Australian Capital City markets chugged along. Then in 2006 the Melbourne property market started firing again and in 2007 the Brisbane, Canberra and Adelaide markets performed strongly as Perth and Darwin came off the boil. The answer lies in the supply and demand for properties. During booms, during those periods of very strongly rising house prices a number of things happen, but mainly the rate of construction of new property increases. The reason this happens is that developers and speculators are constantly monitoring the investment equation. Consistently they are looking at land costs, calculating that if they buy land for $X, expend $Y on construction and other costs and they sell for $Z on completion, the difference is the profit margin. When values are rising strongly, then potential profit margins are significantly improved. And when there is a greater potential return, more developers will commit to developments, and therefore the rate of construction increases dramatically. Nobody tells builders, developers or speculators when to stop. They keep building as values are rising to take advantage of the strong market. Then, at some point in time, there will be more dwellings built, and placed on the market, than there are people to occupy them. Now the market stalls. How can values rise any further, when there is a surplus of property and not enough buyers in the market to buy them, or rent them? Values tend to level off, and in some areas even fall.
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So the rate of new construction will decline, but this can take time, as it is not easy to stop when you are in the middle of a project, so the construction level continues to overshoot for some time. Over time, the population continues to increase, and those reaching household formation age continue to enter the market and slowly the surplus is taken up.
Are Property Markets Predictable?
One of the great things about residential property is that you can see what is happening in the market and the property cycle. We know that the people who reach what the statisticians call household formation age; those born twenty five to thirty years ago, are about to enter the market. We know how many of them there are, and we can predict their approximate time of arrival. It is another element of predictability at work in the residential market. As time passes, that excess property that was over built during the boom is slowly absorbed as more people progressively enter the market. The first sign of this is in the rental market. The vacancy rate, that is, the proportion of the rental properties in the market that are vacant at any one time, will fall, and as a result, rents will rise. With rising rents investors are normally the first to be attracted back into the market. If values are remaining relatively level, and rents are rising, then the prospective income return that an investor can receive is increasing, attracting them back to the market. As investors re-enter the market after a downturn, the market will start pushing prices up slowly. Homebuyers see values rising. Homebuyers, especially first homebuyers, are very price sensitive. If values increase 10%, their required down payment also increases. But that attracts more buyers, creating a snowball effect, setting off the beginnings of the next boom. Construction increases as the developers become active again, projecting us into the next cycle. It should be made clear that property prices do not rise sharply at the beginning of the property cycle. Prices initially rise slowly and the dramatic increases only occur in the last year or two of the boom part of the cycle.
The Supply and Demand Equation
You can see the importance of supply and demand in determining whether values will rise or fall. And this overshadows interest rates, tax changes, budgets and elections, and other factors. Supply and demand drives prices. Other matters can affect the timing of the changes, but supply and demand are the fundamentals in determining whether values will rise or fall. And the supply and demand see-saw will go on forever.
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Predicting Property Market Growth a Fundamental Approach

The forces of supply and demand have always been and will always be the engine that drives residential prices. All things being equal, which in economic terms simply means ignoring all the minor variables and fluctuations at work in any economy, if demand exceeds supply, prices will rise. If supply exceeds demand, prices will fall, or remain the same. If demand equals supply, nothing much will change. But in property terms, what is supply and demand? There are a number of organizations that monitor the fundamentals and predict the property cycles based on a fundamental approach, just like many stockbrokers try to predict the share opportunities based on the fundamentals of a company. You should consider subscribing to: 1. Residex provide credible property forecasts 2. BIS Schrapnel economic forecasts seem to receive a lot of publicity but I place little value in their forecasts. 3. REIA you can get their archived information from their web site or subscribe to get the latest information 4. ANZ Bank puts out a very good half yearly quarterly property report that is included with this workbook. 5. The Australian Bureau of Statistics puts out various reports predicting the property cycle. 6. The HIA It would be great if I could say all these reports gave consistent predications, but they often vary. To come to their conclusions the analysts look at some of the following factors:
Supply
Supply of property in a residential market means the total stock of dwellings, which exist in that market. Forecasting changes to the number of dwellings is the important point. This involves quantifying the likely rate of completion of new dwellings, the number of demolitions of existing dwellings, allowing for second or holiday homes that are not primary residences and for any rental vacancy factor.
Demand
Demand in a property market relates to the number of households that require a roof over their heads, and how that may change over time. Sounds simple, but in fact, is quite complex. All of the following points contribute to that demand. Current number of households, the shrinking size of those households, the explosion of single person households due to people living longer, high divorce rates, the immigration cycle, interstate migration patterns, children living with parents longer than in the past, marrying later, having children later,
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the birth rate, changes in employment locations and the effect of the information revolution. All these come together to tell us the rate of new household formations for a given area, and therefore the number of dwellings that are required to house that population.
The Impact of Household Formations
We know over the last couple of decades the average household has shrunk from around 3.6 people to about 2.7 people today. You could quite rightly conclude that even if population did not increase, this change alone has been generating increased demand for housing. Falling household size is the result of many changes in the demographic make-up of our population including: People are living longer and are healthier and more mobile in retirement, causing us to remain in the family home longer than our parents might have. A high and increasing divorce rate is also a major contributor to falling household size. One household separates to form two households. People are marrying later in life is leading to the growing incidence of younger people in single household situations.
Natural Population Increases
We also know the approximate rate of new household formation likely to occur from natural population increase. People form new households when we leave the parents nest and this, on average, occurs when we are in our late teens or early twenties. This can be predicted by looking at the number of people who were born say twenty to twenty five years ago.
Interstate Migration
Interstate migration varies over time. People move from one state to another chasing a better lifestyle. They tend to move interstate if housing is more affordable or if job prospects are greater. Interstate migration is strongly related to a states economy when the economy is doing well migration increases.
Immigration
Immigration is a political football but the Australian government needs to bring in more immigrants to replace retiring baby boomers and to help our economy because of our low unemployment rates. Our industries are working to capacity and need more skilled workers. In 2005 the Federal government increased immigration by 20,000 people per annum so that now our net overseas migration stands at about 135,000 new immigrants per annum.
Investor Activity
During boom times like we have had over the last few years, the effect of investors must be taken into account as they can account for around 30% of all transactions.
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Vacancy Rates
It is said that the market is in equilibrium when the vacancy rates are about 3%. When vacancy rates fall rents increase and investors receive an increased yield on their investments eventually property prices increase.
Interest Rates
The prevailing home loan interest rate effects affordability of houses.

Economic influences
The general state of the economy has an impact on the demand for housing. A poorly performing economy will affect the prosperity and spending power of people including their ability to afford accommodation, but houses or upgrade their houses. During periods of economic growth people usually feel wealthy and comfortable and buy new houses, upgrade or renovate their existing home and buy investment properties. Economic factors affecting the property cycle include GDP growth, consumer and business confidence, inflation, interest rates and unemployment rates.
Where are we in the Property Cycle?

Firstly it should be understood that there is not just one property cycle. In Australia there are different property markets each moving in their own cycles. In 2004 Brisbane and Perth had strong capital growth while Melbourne and Sydney had slight negative growth of their median prices for property. In 2005 the Brisbane market slowed down, but Perth and Darwin kept booming. At the time of writing this version of this e-book in mid 2006, the Melbourne property market has moved into the early upturn phase of its property cycle while Sydney and Brisbane are near the bottom of their cycles and in a stabilisation stage of their cycles. The Perth and Darwin property markets are still booming. Further in each capital city there are minor cycles with some suburbs out performing others. Usually related to that important factor we have been explaining supply and demand. As the graph below shows, property prices increase over time and good properties will double in value every 7 to 10 years. The graph also shows the black real property cycle.
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PRICE
Perception Reality
B A C
TIME
As I explained earlier in this report, the crowd is always late. They follow the perceived cycle (red dotted line.) Currently (mid 2007) the Sydney property market is somewhere around point A, yet the perception of the general public is that our markets have a long way to fall and they are considering selling their properties. They think we are at point B. The general public will not get back into buying property and in particular investment property until they feel the market is strong and rising again. You see the general public buys property on gut feel, on emotion. And where do they get their gut feel from. Usually the popular press and the media. So they will not re enter the market until they hear that auction clearances are rising and that property prices are rising and that everyone else is buying property. So they will not re enter the property market until point C in the graph above. What has really happened is that in the meantime professional investors who do not buy on gut feel, but on considered research have pushed prices up to point D
In Summary
Cycles are an inevitable part of any investment market, and our property markets are behaving normally when prices fall slightly or remain flat for a while. This does not mean that there are no opportunities out there for property investors. There are! Remember that there are local, as well as national, property cycles. Each state is in a slightly different stage of its property cycle and the current negative sentiment of some
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property owners has created some great buying opportunities for smart investors who take a counter cyclical investment approach. This is a time to be selective and to think long term. As an investor you dont have to wait for the property cycle. You can create your own capital growth by buying well. By purchasing your investment property below market price and then add further value by renovating, refurbishing or redeveloping it.
For a detailed account of the factors that influence property cycles and how you can make money using this knowledge I suggest you read Grow Rich with the Property Cycle by Kieran Trass. This book is available in good bookstores or at www.hybridgroup.co.nz
INVESTORS: WHY USE METROPOLE BUYERS AGENCY? BECAUSE YOUR CANT AFFORD NOT TO!
With all the property marketers, developers and agents out there looking after their own interest, its a great feeling having an agent working for you and not the seller. We have offices in Melbourne and Brisbane, and have no properties for sale, but we do have access to every property on the market. Our independent network of solicitors, accountants and consultants ensures you get solid impartial advice. Call us today on 1300 20 30 30 to discuss your options.
Metropole
Property Investment Strategists
KNOWNPROVENTRUSTED
www.metropole.com.au
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This top selling property book is written both for beginners as well as advanced property investors and explains how our next property boom will be Australia's biggest property boom and possibly our last big boom. This is supported by strong demographic evidence that also highlights our next major growth regions. The author details the most important things investors must know to take advantage of the next property boom. For advanced investors there are chapters on: tax loopholes, finance strategies, negotiation, dealing with agents, auctions, renovations and an extraordinary section on living off the increasing equity of your Multi Million Dollar Property Portfolio. AVAILABLE AT ALL GOOD BOOKSHOPS or purchase at our online bookstore at www.PropertyUpdate.com.au
Page 25
NEW AUSTRALIAN BOOK TELLS YOU..
ALL YOU NEED TO KNOW ABOUT BUYING AND SELLING YOUR HOME
Do you know how much you can really afford to pay for a house? It could be much more than you think! Do you know how to get the lenders to say more often to your loan requests? There are ways of making sure you are a good credit risk. Do you know how to find the right home that will suit you now and in the future? And would you like to know how to negotiate its purchase at the best price? Do you know how to choose the right agent to sell your house? And do you understand why some properties should be auctioned to achieve the best price while other properties are best sold privately
This practical guide answers these questions and shows you step by step how to find the home of your dreams or how to sell it when you are ready to move on. The book is based on facts and Michael and Pamela Yardneys experiences in property over the last 30 years and gives practical (not theoretical) advice on buying and selling your home that is relevant to todays property market. Quite simply it is a must read for anyone planning to buy or sell a house and gives you the edge you need to get your dream home. RRP $29.95 AVAILABLE AT ALL GOOD BOOKSHOPS or purchase at our online bookstore at www.PropertyUpdate.com.au
DISCLAIMER: PropertyUpdate.com.au, Metropole Property Investment Strategists, Metropole Projects, Metropole Property Management and their related businesses makes no representation and gives no warranty as to the accuracy of the information in this document and accepts no liability for any errors, misprints or omission herein (whether negligent or otherwise). Metropole Properties Pty. Ltd. shall not be liable for any loss or damage whatsoever arising as a result of any person acting or refraining from acting in reliance on any information contained therein. The author is NOT a licensed investment advisor or planner; a licensed real estate agent; a licensed financial planner or advisor; a qualified or practicing accountant; a qualified or practicing finance professional. All information in this newsletter been obtained by the author solely from his own experiences as an investor and is provided as general information only. No reader should rely solely on the information contained in this publication as it does not purport to be comprehensive or to render specific advice. As such it is not intended for use as a source of investment advice. All readers are advised to retain competent counsel from legal, accounting and investment advisers to determine their own specific investment needs
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Understanding Property Cycles

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UNDERSTANDING PROPERTY CYCLES

By Michael Yardney Director, Metropole - Property Investment Strategists