At the beginning of this year, I wrote that the Australian property market appeared to be approaching the top of the current cycle. Since then, the market has turned. Prices have begun falling across the major capitals, auction clearance rates have weakened and buyer sentiment has deteriorated considerably.

That’s fine. There is always a top somewhere in a property cycle, just as there is always a downswing that follows it. Eventually that downswing runs its course and another upswing begins. None of this should be particularly surprising.

The more interesting question now is what happens next.

We are still in the downswing and I don’t think there is any reason to pretend otherwise. Sydney and Melbourne have already fallen more than 5% from their recent peaks, while Brisbane, Adelaide and Perth appear to be in the earlier stages of their corrections. Interest rates remain high, borrowing capacity has fallen, investor policy has changed and buyers have become increasingly cautious. Prices can quite reasonably fall further from here.

But investing becomes interesting precisely because markets don’t move in one direction forever. Once you accept that we are moving through a cycle rather than watching a permanent change in direction, the problem becomes one of price and timing. And timing is extraordinarily difficult.

We’ve Seen This Pattern Before

The chart below compares Sydney auction clearance rates with quarterly price growth going back to 2011.

What interests me isn’t simply that clearance rates are weak today. It is how familiar the broader pattern looks. There were significant downward movements around 2011, 2015, 2018, 2020 and 2022. The causes weren’t always the same. We had different combinations of interest rates, credit restrictions, economic shocks and changes in sentiment, but the price behaviour was surprisingly similar.

Markets weakened, clearance rates fell and price growth followed. Eventually conditions changed and the market moved into another upswing.

There is something else in the chart that is probably more important for investors. Look at how quickly some of those turning points occurred. In several cases, the transition from falling prices to recovery was relatively V-shaped and the period around the actual bottom was remarkably brief.

That doesn’t mean the current cycle will necessarily do the same thing. In fact, I suspect this bottoming process could take another year or two to fully work through. What history does show is just how difficult it is to wait for the market to definitively tell you that the bottom has arrived.

By the time it does, the bottom may already be behind you.

Everyone Wants to Buy at the Bottom

In theory, investing is simple. Buy as cheaply as possible and sell much higher sometime in the future.

If I knew a property selling for $800,000 today would be available for $750,000 in six months, obviously I would wait. The problem is that nobody rings a bell at the bottom of the market. You only know where the bottom was after prices have started rising again.

This creates one of the great contradictions of investing. People want low prices and certainty at the same time, but markets rarely provide both. Prices are usually low precisely because certainty has disappeared.

When auction clearance rates are weak, prices are falling and everyone is worried about what happens next, buyers demand a discount for taking that uncertainty. Once the economic outlook improves, borrowing conditions become easier and everyone agrees the market is recovering, that uncertainty begins to disappear. Unfortunately, so does some of the discount.

Maybe “Low Enough” is More Important Than “The Lowest”

This is why I think trying to identify the exact bottom is probably the wrong objective.

For a long-term property investor, the more useful question is whether prices have become low enough. There is an important difference.

Buying at the absolute bottom requires extraordinarily accurate market timing. Buying when an asset has fallen far enough that the price makes sense relative to its yield, replacement cost, long-term demand and future growth prospects requires something different. It requires an assessment of value.

If you’re planning to own an investment for 15 or 20 years, getting that assessment broadly right matters far more than knowing whether prices might fall another few percent over the next six months. A better entry price improves the economics of the investment from the day you buy it. You borrow less, your rental yield on the purchase price is higher and, assuming the long-term fundamentals remain intact, your lifetime return improves.

This doesn’t mean ignoring where we are in the cycle. Quite the opposite. If we are still moving through the downswing, investors should expect that some assets purchased today may become cheaper before the cycle turns. The point is that waiting for the absolute lowest price requires knowing something that can only really be known with hindsight.

You don’t necessarily need the lowest price. You need a sufficiently good price.

We Have Remarkably Short Memories

One of the strangest things about investing is how differently we remember markets compared with how we experience them.

Talk to someone who bought property 15 or 20 years ago and they will usually tell you what they paid and roughly what it is worth today. What tends to disappear from the story are all the uncomfortable periods in between.

They forget the interest rate scares, the bad auction weekends, the recession forecasts, the credit crunches and the newspaper headlines predicting much larger falls. They forget the year when their property didn’t grow at all, or the period when it temporarily fell in value.

Eventually all of that gets compressed into two numbers. “I bought it for $500,000 and now it’s worth $1.2 million.”

Looking backwards, the decision seems obvious. They may even wonder why they didn’t buy another one. The problem is that it wasn’t obvious at the time. The uncertainty they have forgotten was exactly what made the opportunity uncomfortable in the first place.

This is one of the reasons hindsight can be so misleading when we look at historical property cycles. We can see the bottom on a chart now because we already know what happened next. The person making the decision at the time didn’t have the rest of the chart. Neither do we.

The Fundamentals Are Changing While Prices Fall

There is another part of the current cycle that I think will become increasingly important over the next couple of years.

A lot of attention has understandably been focused on the recent changes to property investment policy, particularly the changes to SMSF borrowing, the treatment of capital gains and negative gearing on established property. Most of the discussion has centred on what those changes mean for investor demand and property prices today.

Australia was already struggling to build enough housing before these changes were announced. Construction costs remain high, development finance is expensive and many projects are sitting close to the edge of feasibility. New apartment developments also depend heavily on presales before lenders will provide the construction finance required to actually build them.

If policy changes reduce investor participation in new housing, some projects that were marginally viable may no longer proceed. That doesn’t create an immediate shortage because the apartments being completed today were generally sold and financed well before the current downturn. The effect appears later, when the projects that fail to commence today should have been delivering housing into the market. Population growth doesn’t stop while that happens.

This is why I think rents could rise considerably faster than they otherwise would have over the next couple of years. The housing shortage already existed. If the construction pipeline becomes thinner while the number of people requiring housing continues to increase, the pressure eventually has to appear somewhere.

Most likely, it appears in rents first.

Falling Prices and Rising Rents Reset the Equation

This creates an interesting dynamic because prices and rents don’t have to move in the same direction.

Higher interest rates can reduce borrowing capacity and push property prices lower at exactly the same time that weak construction and population growth push rents higher. There is no contradiction between the two because they are responding to different parts of the housing system. For investors, however, the combination matters.

If the price of an asset falls while the rent it produces rises, its yield improves from both directions. The purchase price becomes cheaper while the income generated by the asset becomes stronger. That is part of the process through which property fundamentals eventually reset.

It doesn’t mean prices suddenly turn around because rents increased for a few months. There are still interest rates, borrowing capacity, sentiment, employment and many other factors determining how much buyers can and will pay. But as yields improve and prices become more attractive relative to the income those assets produce, the investment equation gradually changes.

The conditions that contribute to the downswing can therefore help create the foundations for the next upswing.

That’s the part of the current market I think is becoming increasingly interesting.

This Recovery Probably Won’t Be Even

There is also a reason I wouldn’t spend too much time trying to identify a single bottom for “the Australian property market”. There isn’t one.

Different parts of the country are already at different stages of the cycle, and even within individual cities there is considerable variation between suburbs and price points. The national or capital-city median compresses all of that into a single number, but that isn’t how markets actually behave.

My expectation is that lower-priced assets will show greater resilience through this correction. Affordability matters enormously when borrowing capacity is constrained, and buyers who are priced out of one part of a city don’t simply disappear. Many move down the price curve or further out geographically.

Yield should matter more as well, particularly if the rental pressures we’re expecting begin to emerge. When money is expensive, the income produced by an asset becomes increasingly important. Markets and properties that were largely overlooked during the previous cycle because they weren’t producing spectacular capital growth can suddenly look much more attractive when the economics change. Some of those overlooked markets may therefore be among the first to recover.

The middle of the market could behave differently. I suspect many of those areas perform better once the recovery has become more established, borrowing conditions improve and buyers regain enough confidence to move back up the price curve.

In other words, the current correction may be relatively broad, but I don’t expect the eventual recovery to be.

The Question Has Changed

At the beginning of the year, the question I was thinking about was whether we were approaching the top of the cycle. We were, and that top has now passed. To be clear, I don’t think we’re at the bottom yet, we are now working our way through the downswing. The next question becomes what comes after it? 

My expectation is that the broader bottoming process still has another one to two years to play out, with different markets reaching their turning points at different times.

What makes this phase particularly interesting is that the foundations of the next cycle can begin forming before the current one has finished falling. Prices can continue correcting while rents rise. Yields can improve while sentiment remains poor. Previously overlooked markets can become progressively better value even while the national headlines remain negative.

None of those things individually tells us that the market has bottomed. Together, however, they gradually reset the fundamentals that capital responds to.

Trying to identify the exact month, quarter or price at which that process ends is tempting, but I’m not sure it is particularly useful. The better question for investors is whether particular assets are getting cheap enough, and their underlying fundamentals strong enough, to justify taking the remaining uncertainty.

That requires selectivity. Falling prices don’t automatically create value, just as rising rents don’t automatically create a good investment. Location, supply, yield, affordability and long-term demand still determine what you’re actually buying.

History does give us one useful reminder. There has always been a downswing and there has always eventually been another upswing. The periods between them rarely feel comfortable, and the bottom has usually been far easier to identify on a chart several years later than it was while we were actually living through it.

For a long-term investor, perhaps that is the wrong target anyway.

The objective isn’t necessarily to buy at the lowest possible price.

It’s to recognise when the price has become low enough.