Know the Cycle

Posted by Daniel Joseph

More often than not, Australian investors don’t use the property cycle to their advantage; instead, they invest in high demand markets, opting to be one of the many sheep instead of the shepherd. Why? It takes more courage and foresight to be a shepherd (early adopter, for all you marketing types) than it does to be a sheep (the laggard of the group).

Before I get into the importance of knowing the cycle, here’s an example of how being a sheep can get you into trouble:

The herd was running rife in Surfers Paradise between 2002 and 2007, with more than 15,000 sales recorded; that’s three times the sales made in Sydney (postcode 2000) over the same period! The result of this strong demand? The average annual price growth of Surfers Paradise over the period was close to 15 per cent. This prolonged and excessive growth period led to a correction, the effects of which are still being felt today: the median price of an apartment in Surfers Paradise is 13 per cent lower now than it was in 2007!

Back to knowing the cycle. The figure below (source: ABS 6416 Residential Property Price Indexes) shows the performance of the Sydney, Brisbane and Melbourne property markets over the past decade (for brevity, only these markets were included in analysis).

Brisbane was the leader in the 2007 market peak with a year on year growth high of 21 per cent, followed by Melbourne and Sydney with growth rates of 14 and 8 per cent respectively
Melbourne led the way in 2010 with growth of 25 per cent, followed by Sydney’s 22 per cent and Brisbane’s 15 per cent
Sydney leads the way in 2015 with a growth high of 20 per cent, compared to Melbourne’s 12 per cent and Brisbane’s 9 per cent

Knowing the cycle, dollar value:

Had you invested in a $500,000 property in Brisbane in 2004, you’d have had more than $200,000 in equity by 2007 to help build your portfolio compared to $93,000 in Melbourne and negative $40,000 in Sydney
Invest in a $500,000 property in Melbourne in 2008 and you’d have $175,000 in equity by 2010 compared to $126,000 in Sydney and $75,000 in Brisbane
Invest $500,000 in Sydney in 2010 and you’d have $200,000 in equity by 2015 compared to $115,000 in Melbourne and $112,000 in Brisbane

What this illustrates is that having a one dimensional view of property investment bound by perceived geographical constraints can set you back years in your portfolio building journey. Blue Wealth’s mission is to provide you with the education and knowledge so that you have the courage to be a shepherd in a market dominated by sheep.

Posted by Daniel Joseph, on 1st Sep 2015