Understanding the Property Cycle and When to Buy

It’s no secret that mortgage brokers are helping Australians procure a lot of home loans in the Baldivis, Rockingham and Kwinana areas. All 3 areas continue to be “hot markets,” with prices finally showing an inclination to rise back to former levels. Some think it is too late to buy in those suburbs and in the Perth area in general, while others are still waiting for interest rates to drop even further from their current all-time lows.

Mortgage Brokers on Buying a Home

So, who’s right? How can you tell when to buy, whether you are an investor or someone looking for a home? To understand this, you need to understand the forces at work determining whether prices rise, fall or stay level.

The Property Cycle

Here is a very simplified version of the property cycle. When the economy grows and unemployment is low, low interest rates stimulate buying behaviours, creating a demand for housing. To keep up with the demand, housing developers build more houses. Eventually, they build too many and oversaturate the market, causing a glut of housing and lowering demand.

This cycle forces prices to rise in times of demand and lower in times of oversaturation. In addition, the ability of people to pay for housing has an effect on demand.

Rental Yields and their Effect on Housing Prices

Rental yield is derived when one divides the price of a house by the amount of rent collected in one year. When rental yields rise past a certain level, it becomes more expensive to rent than to buy; when rental yields fall too far, it becomes less expensive to rent than buy. This obviously influences demand, which influences price.

Stated another way, high rents make buying attractive and low rents make renting attractive.

So What is the Best Indicator?

The best market indicator we have found is the gap between capital growth in home value and percentage of rent increase. If rents are increasing faster than home values, it indicates the highest potential for capital growth.

The market with the highest growth potential in Australia is Perth, with an increase in home values of only 2% since December 2007, while rents have grown 48% in the same time period.

Want to learn more? Call (08) 9527 1800.