Sydney’s stagnation…another 8 years?

As you’ve heard many times, property markets are cyclical. Typically, a period of 15 years will see a market complete a cycle, of course this can vary as a market is based on many moving parts. In this insight, we’ll look at the different parts of a market cycle previous post-boom periods in Sydney.

Typically, a full market cycle consists of 6 periods:

  • Boom
  • Correction
  • Stagnation
  • Opportunity
  • Value
  • Danger

The length of time which a market spends in each part of the cycle is reliant on many independent variables. Some of which include interest rates, the nation’s economic landscape, the balance of supply and demand and the banking environment.

A boom can be defined as consecutive periods of double digit growth in property values. A correction occurs in the period post-boom. The significance of a correction can vary, in most cases this depends on the significance of the growth throughout the boom. As an example, between 2002 and 2007 there were more than 15,000 sales recorded in Surfers Paradise. This demand meant that the average annual growth of that period was 15 per cent. This prolonged and excessive growth period led to a correction, the effects of which are still being felt today. The median apartment price in Surfers Paradise is 13% lower now than it was in 2007. The severity of this is not consistent across all markets and in some cases a more moderate rate of growth can be identified as the correction period.

A stagnation can be extensive and refers to the periods of subdued growth or relatively flat market performance. This transitions into the period of opportunity as markets begin to show strong outperformance in the four key macro-economic areas. Value is identified as the perfect point of opportunity, purchasing just before the beginning of a property upswing. Danger is stipulated as the period of growth where markets seem to be reaching their peak. Investing in these periods leaves you at risk of paying above market values. The market is filled with those with a ‘fear of missing out’ prices often ascend past their fundamental values and this is then realised throughout the imminent period of correction.

There is often a misconception that Sydney is and has always been Australia’s top performing market and understandably so, the past 5 years has seen Sydney experience one of its strongest periods of growth (Click here for our previous insight on which market is Australia’s strongest).

Of course, when investing in property your goal is to achieve future growth therefore investing in markets which present the strongest growth potential is important. Creating an effective property portfolio and growing your asset base as quickly as you can be largely reliant on the markets you invest in and your ability to select markets at a point of opportunity. Avoiding the periods of stagnation and correction can minimise the time required to create equity and in turn grow your portfolio.

The question often asked is, ‘Should I invest in Sydney?’ So, let’s have a look at what happened last two times Sydney experienced such a strong period of growth. The data used below has been extracted from the median house price data available through the Australian Bureau of Statistics (ABS).

Sydney’s median house price peaked previously in 1990 at $194,000, this was a result of an average annual growth rate of 13.4% in the 6 years prior. That’s right, as Sydney had a median house price of less than $200,000. In the following eight years, an average annual growth rate of 3.3% was recorded – in line with the inflation rate over the same period.

In 1999 to 2004 Sydney again performed strongly with an average annual growth rate of 13%. The eight years which followed saw an average annual growth rate of 1.29% and was also a period where Sydney was one of the countries worst performing property markets.

From 2012 to 2016 Sydney experienced an average annual growth rate of 12.8%. Past performance suggests that we are likely to now experience an extended period of stagnation. The external factors which will drive this is the strain on housing affordability, risk of rising interest rates, the tightened lending environment and the change in media sentiment. In the current market median house prices are over ten times the average annual household income.

Understanding cycle’s and market trends is the most accurate way to identify the markets offering potential growth. As an example, Brisbane has a tendency to lag Sydney, with all of Brisbane’s peaks occurring in the post-boom correction/stagnation period for Sydney. Key indicators such as interstate migration, relative affordability, slowing supply and increased infrastructure spending have now swung in Brisbane’s favour and with Sydney slowing the trend looks set to continue.

Blue Wealth clients invest with us to capitalise on the markets which are presenting the strongest fundamentals for future growth. Doing so, will allow you to maximise your property portfolio through equity and leverage. According to our property clock, this is where we place the markets.

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