Property cycles: when to buy in Sydney and Melbourne

Property has always been a cyclical investment. There are periods of growth followed by periods of flatness or market corrections.

These cycles can be driven by changes in supply and demand, lending conditions, economic prosperity and population growth.

Property, unlike some other asset classes, is both heterogeneous and highly segmented. It is made up of about 10 million homes across more than 15,000 suburbs in six states and two territories, and no two are identical in size, location or condition.

That opens up huge challenges when it comes to comparing markets as well as big opportunities for savvy investors with the skill to sense of the data.

With headlines screaming that Australia’s two biggest residential markets, Sydney and Melbourne, are going through a cyclical decline, you might be tempted to look at other markets. But is now the right time to buy at cyclical lows in our major capital cities?

Before you start looking for your next, or first, property, here are four questions to ask.

  1. What is the purpose of your next investment?

Is this a property you are buying to live in? That is, will it become your principal place of residence or is it going to be rented out as an investment property?

If, for example, this is primarily for the purpose of providing you and your family with a home, then the decision of where (and when) to buy is probably going to come down to more emotional factors.

How close is the property to the things that are important to you, such as your work, access to public transport, schools, shops or medical facilities? Or other lifestyle features, such as proximity to beaches, parks or lakes, might be more important.

  1. What is the size of your next investment?

The size of your deposit and your ability to borrow money will determine the maximum price you will be comfortable paying.

That, in turn, will determine what area and what property type you will be able to afford. If, for example, your budget is $300,000, made up of a $60,000 deposit (plus savings for transaction costs) and a $240,000 mortgage, you are probably not going to be able to buy a detached house in a suburb like Mosman in Sydney or Toorak in Melbourne.

In fact, the cheapest property, a one-bedroom unit, in Mosman is probably going to start with a $5. In Melbourne, which is slightly more affordable, you might still be able to find an older-style one-bedroom unit in Toorak in the low $300,000s.

  1. Is this the only investment property you will buy?

Data from the tax office suggests that the vast majority of investors will only ever own one or two properties.

So, if, like the majority of property investors, you are not going to build a portfolio over the course of your lifetime, then the choice of where to buy becomes even more important.

  1. How long do you intend to hold onto it?

This is perhaps the biggest trap for many new investors. While it is possible to make money in the short term, most investors will buy property with the aim of making money over the longer term.

If you are also going to buy only one investment property and hold it for the long term, you might like to consider some of the more pertinent macroeconomic data. Research by Charter Keck Cramer suggests that by 2050 Australia’s population will swell from the current 25 million to over 38 million.

However, most of that growth will be borne by Sydney and Melbourne and both cities will swell to almost eight million people each.

With that level of growth, and assuming that supply is unable to keep up with those levels of demand, it is likely that in 20 years both Sydney and Melbourne prices will be far higher than they are today.

The big question is, will they be higher than prices in all the other property markets around Australia? For example, will Sydney and Melbourne outperform Adelaide, Darwin, Perth, Brisbane or certain regional centres in the long term (even if they may not do so in the short term)?

Trying to pick the bottom of any declining market can be tricky and understanding what the property price drivers will be five, 10 or even 20 years into the future can be even more puzzling.

This is made harder by the fact that just because median property prices may drop in an area it doesn’t mean that all property types will be affected equally.

For example, a decline in a suburb’s median price may be the result of either fewer higher-priced properties selling or more affordable properties selling.

From Money Magazine

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