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What can we learn from past property cycles?
Many investors are wondering where our property markets are heading. They are receiving mixed messages in the press.
Those invested in property on Australia's east coast a few years ago experienced a boom and suddenly things have changed.
It had been an exciting few years in property until early 2004.
If you put your money into a property just about anywhere in the previous few years- from a fibro shack in Tasmania to a shop in a Ballarat suburb - you were feeling pretty smart at the end of 2003.
Then our property markets changed and for the next few years remained stagnant.
Unless of course you bought in Perth or Darwin where you could have purchased virtually any property, gone away on holidays and when you came back the value of your property would have increased dramatically.
But now these markets are faltering and price growth has weakened.
Many investors are wondering "what comes next?"
The problem is these investors have never owned properties during a complete property cycle, which makes them uncomfortable as the various stage of the property cycle move on.
To help you understand where our markets are heading I thought I would delve back into my memory and see what we can learn from how our property markets performed over the last few property cycles.
The bottom line is that as a long-term investment, property is hard to beat.
I recently read a research report suggesting that residential property has been the best performing asset class over the past 20 years - averaging a 14.5% return (including rental income and price gains).
This was followed by listed property trusts at 13.7% per annum. Australian shares were third, with 13.5%, according to the S&P/ASX 200 Accumulation Index.
As usual these figures don't really reflect how good property is as an investment.
They don't take into account how much better your funds perform when you invest in property because you have ability to borrow against it and leverage your equity.
When you take this into account, property far outperforms the other asset classes.
But investors must remember that although there's little doubt that property is a potent wealth-builder in the long term, it does go through the same kinds of cycles as other investments including the share market.
This means that those high 20-year average returns take into account two periods of very high returns, but also two periods when property went nowhere for a few years.
People who invested in the Melbourne or Sydney property market at their peaks in 1989 would have seen the value of their properties stagnate or even fall over the next 4 or 5 years.
Back in the early 1980's house prices across most of the capital cities were stagnating for a couple of years.
Melbourne's median house price languished at about $50,000 from 1980 to 1983 then grew steadily but unspectacularly before really taking off in1987.
In Sydney, the median house price reached about $80,000 in 1981 and stayed there for the next four years.
Perth prices were falling in 1983, and Brisbane house prices were going nowhere after a year or two of 25% returns in the early 80's.
It took until 1987 before these property markets all began to boom again.
In Adelaide, there was a major rise in property prices between 1982 and 1984 before they went sideways again until 2000.
After crashing in 1990, property prices in Sydney and Melbourne stayed flat until 1995.
And it wasn't until 2000 that prices in Brisbane and Adelaide finally took off again after a decade of growing at 5% or less a year.
In Perth, a short recovery followed the boom and bust of the late 1980s and early 1990s. The market there has since ambled along with annual returns at about 6% until its recent boom.
As a property investor you must be aware of these cycles.
Sure it's hard when you are in the middle of the flat period of the property cycle as Sydney has been for over 3 years.
But look at the property prices that prevailed 10 and 20 years ago and look at property prices today.
Property investment is a long term play - you need to be patient as values in our major capital cities have doubled every 7 to 10 years.
What were the factors behind those cycles?
Property prices are pushed up by the demand created by a healthy economy, by high levels of employment and by population movements caused by migration and immigration.
It's the old story of supply and demand.
They are dragged down when the economy performs poorly, when interest rates rise, when employment and immigration figures fall and when supply exceeds demand.
This was the basic pattern of the property booms and busts of the early 1980s and the early 1990s.
Spectacular growth and a 12% inflation rate in the late 1970s were nipped in the bud when mortgage rates rose from 9.5% in 1978 to 13.5% in 1982.
The government increased interest rates at the time and successfully brought inflation rates back down to just over 5%.
In 1990, interest rates rose to 17% to bring down inflation from about 7% to around 3%. This also brought on Paul Keating's "recession we had to have".
Things are no different this time around. To help keep inflation under control the Reserve Bank increased interest rates three times last year and is now hinting that it may increase interest rates again over the next few months.
All this shows that cycles are an inevitable part of any investment market, and our property markets are behaving normally.
Remember that there are local, as well as national, property cycles. Each state is at a different stage of its property cycle.
Perth and Darwin are near the peaks of their property booms, while Sydney is at the other extreme having been in a slump for over three years.
The Melbourne and Brisbane property markets have moved into the early upturn stage of their property cycles over the last 12 months.
In the meantime Adelaide Canberra and Hobart have been chugging along nicely but are now slowing down a little.
And within each state there are cycles within the various suburbs.
The markets are fragmented with some suburbs, in particular the more affluent near city of bayside suburbs, performing strongly while other suburbs languish.
These cycles mean there are some great opportunities out there for property investors who are selective and think long term.
This is because the next property cycle has clearly commenced on the east coast of Australia and an opportunity like this - to buy properties at the beginning of a property cycle -only happen 3 or 4 times in one's adult lifetime.
Now is the time to buy selectively and take advantage of the next upcoming wave of the new property cycle.
Michael Yardney
Director
Metropole Properties
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