The Property Cycle

Property investment usually falls into three main categories:

  • Land:                 Farming, subdivision, industrial
  • Residential:       Houses, Townhouses, Units
  • Commercial:     Office, Retail, Hospitality, Industrial, Utility

As the above chart shows, property operates in a consistent and predictable cycle. The key driver for all property markets is of course demand. The demand genesis of the cycle is found in the creation of new households. Many make the mistake of believing that new household creation is merely an outcome of population growth, this is not the case. New households are created whenever a need for a new dwelling arises- this can be as common as school leaving children moving from their parents’ home into a different dwelling for the start of their new independent lived as University students or workers. It also follows through that as grouped households (such as share houses) are broken up and individuals and couples look for their own dwellings that new households are created. At the other end of the age spectrum, when parents who have adult children chose to downsize into a smaller dwelling from the family home, this is the creation of a new household.

These new households create the demand on an ongoing basis for the property market. Added to and amplified by a healthy birth rate and immigration from international and interstate sources, the need for dwellings is a never ending part of societal progress and upward mobility. The demand for households drives the construction new houses, townhouses, units and apartments. Once a population base reaches a critical mass, the cycle then demands the creation of auxiliary properties to provide space for the provision of infrastructure, products, and services to assist and support the population. The first of these are socially needed faculties such as schools, police and fire stations.

Think of any little rural town you have been to. You will see many homes of different make up and size. You will also notice a local corner store, a post office, a petrol station, a bakery and always one or two pubs. These represent the frontline of retail properties that begin the next phase of the property cycle. As the population continues to grow and more households are created, other more sophisticated retail properties begin to spring up - think of a major supermarket chain moving into town, major fast food outlets, locally restaurants and cafes, more petrol stations, maybe a dedicated mall or shopping centre is built offering many more retail stores such as clothing, hair salons, hardware, department and gift stores.

The next step in the property cycle is the introduction of light industrial facilities. These include light manufacturing industry, auto and smash repair providers, warehouses for product distribution and fabrication plants. These product and service providers usually take up land at the outskirts of the town away from housing, retail and commercial sectors.

From this stage comes the commercial property demand, where offices are created to house the professional services the population of the town require. Think of solicitors, accountants, architects as well as medical practitioners like GP’s, physiotherapists and dentists all needing consulting suites. These commercial properties also spread out into the areas of tourism and recreation encompassing hotels, resorts, golf clubs, recreation centres such as indoor pools, sporting complexes and of course day care centres.

Following this stage in the property cycle demand move to heavier industrial complexes and social infrastructure. These take on the large scale property projects that solidify the sustainable nature of a population centre and include public transport, major road upgrades and freeway systems, ports and harbours, power generation and sewage and water treatment plants.

Once these have been rolled out, the backfill begins- this term describes the process of the cycle rebuilding over and over - more dwellings making demand for more and diversified retail, creating demand fro further commercial space spurred on by greater professional services and specialisation in the local economy and of course this feeds into the need for more light and heavy industrial facilities and further growth and upgrading of social infrastructure.

So when is the right time to buy into the property cycle?

That depends solely on what outcome you expect to gain from the investment. These factors are covered in the ‘Growth Profile’ and ‘Yield Profile’ sections of the site, but to give an overview:

If you are looking to purchase a home or commercial property for growth - that is capital appreciation in its value - you are always better served getting in at the start of the cycle - and if you can’t recognise where a particular area is at in the cycle then try to get in before further backfill kicks off. This is your best chance of hitching your investment spend to the next wave in growth in values in any location- just as new investment and transformation hits. Once it has washed through an area you may be facing a long wait for the cycle to bring you around again to the next transformative phase of your neighbourhood.

If you are looking for a consistent and growing rent return (yield) from your property investment, then you need to be investing into commercial property and doing so when the cycle is well established and around half way through. This allows you to purchase a new or near property with good depreciative value, get a solid and growing rent return due to your location in the demand area for commercial property. It also means your property will benefit from the growing population and demand that comes with the cycle repeating in future years. The key to this type of investment is that you hold for as long as you can and let the growing demand drive rents and therefore your yield form the investment up whilst your initial cost to invest remains static.