From Property Talk Community Wiki

Property Cycle

It is widely recognised that property (along with other forms of investment) follows a predictable cycle. The New Zealand property cycle has three recognised stages of boom, slump, and recovery.

Property Cycle Stages

The following is an overview of the property cycle stages. It should be recognised that there are a number of sub stages and many different things happening throughout each stage. It is not always obvious that one stage has finished and another has started.

Boom

What is observed:

• Initially rents rise but then plateau
• Property prices rise and the number of days to sell fall
• Yields fall as prices rise but rents do not
• Few mortgagee sales
• Property finance is easy to obtain and there are a number of new lending products
• People borrow against their increased house values and spend this money on consumer items (TVs, boats, holidays, cars, etc.)
• There are many property seminars competing for investor dollars
• Property is a hot topic in the media. Initially there is much speculation about how price growth will continue, but later the media turns its attention to the unaffordability of property
• There is a lot of talk about how "it is different this time" and expectations that there will be no slump.
  
  --Perry 22:46, 27 December 2007 (NZDT)

Slump

The slump typically starts much earlier than people expect as there is a delay between the triggers (e.g. population falling) and the impacts that are seen in the property market.

The slump is usually the longest stage in the property cycle. The longer and bigger the boom, the longer and harder the slump may be. However, property values do not necessarily fall during a slump, they may simply not grow for long period. This, combined with more difficult economic conditions, can make the slump feel very long and hard.

What is seen during a slump includes:

• Increase vacancies
• Reduced cash flows
• Property price growth stagnates or falls
• Number of days to sell a property increase
• More mortgagee sales
• Property finance is more difficult to obtain
• Doom and gloom about property in the media
• Investors losing money and selling off property.
  
  --Perry 22:51, 27 December 2007 (NZDT)

Recovery

The recovery stage is usually much shorter than the slump or boom. The recovery usually starts from the CBD of main centres and radiates outwards. It may be some months or years before it begins to affect outlying suburbs or smaller towns.

What is seen during a recovery includes:

• Increased rents and cash flows
• Property prices begin to grow
• Number of days to sell a property decrease
• Much confusion in the media about whether growth is sustainable
• Many investors holding off because they have been burned or struggled in the last slump.
  
  --Perry 22:52, 27 December 2007 (NZDT)

Historical Trends

It is often reported that the New Zealand property cycle repeats every 7 - 8 years and that property prices double over this time. Whilst evidence supports the 7 - 8 year period, the next property boom cannot be anticipated simply because it is 7 - 8 years since the last.

There is evidence to show property prices have approximately doubled during each of the last few cycles, but there is no guarantee this will happen again in the next cycle. Also, inflation has occurred at different rates during each of the last property cycles, eroding some of the gains in property values that did occur.

There is also evidence to show that the New Zealand Property Cycle is related to the cycles of the:

• New Zealand and world economies
• New Zealand dollar exchange rate
• interest rates
• other investments.

It is not that any one of the cycles must follow the other, in a set order. Rather that they are all related through a number of factors and drivers.

--Perry 23:02, 27 December 2007 (NZDT)

Property Cycle Drivers

A property boom occurs not because "it is due" by timing calculations, but rather because there are a number of different factors that coincide to make such events happen.

The primary drivers of the New Zealand property cycle are net migration, population growth, and the economic environment. Other factors that affect the New Zealand property cycle include:

• Employment levels
• Interest rates
• Property sales
• Rents and returns
• Property construction (availability of new housing)
• Affordability.
  
  --Perry 23:05, 27 December 2007 (NZDT)

Acknowledgements

This PT Wiki entry is based primarily on information from Kieran Trass of the Hybrid Group. Kieran is a recognised authority on the New Zealand Property Cycle, and published Grow Rich with the Property Cycle in 2004. This book is recommended reading for anyone who wishes to understand the property cycle in more depth.