Do you know about the X factor?

Property investors – property cycles, you really can’t be one without understanding the other.

In a couple of the big city markets, prices started going up somewhere back in 2012 and the upward phase of the property cycle just kept going. Now, in 2018, the heat has come out of these markets, which has a lot to do with lending restrictions and the fallout from the Royal Commission into the banking sector. And don’t be alarmed, this just means that the market cycle is working normally.

Property investors who’ve been at it, and successful, for a long time, know through experience, and possibly mistakes made along the way, that there are some key lessons in the way property cycles work.

The first thing to accept is that the economy and the property markets actually do move in cycles.

Often contributing to cycles is human nature… and mind set. There is so much to hear and read that it’s easy to fall in with the optimism or pessimism of others.

Cycles vary in length, by the way, and are affected by a myriad of social and economic factors; and the action of government can lengthen or shorten the cycle.

Secondly, there is not one property market.

Each state is at a different stage of its own property cycle. Within each state are regions, where markets are segmented by geography, price points and type of property… and are at different stages of their cycles. Even within cities, suburban markets will be at different stages… and so on… and so on. Think of it from the ‘turducken’ or ‘matryoshka’ perspective perhaps… the market within the market within the market…

Then there are market segments where, for example, the top end might perform differently to the new home buyer’s market, the established home buyer market or the investor market.

It’s clearly not a one-size-fits-all situation.

Thirdly, more often than not, somebody is wrong about the stage of the cycle.

As a property investor, you can’t allow ‘following the crowd’ to influence your investment decisions.

Commentators talk about a national market when there is no such thing. Too many naysayers in the media cause investors to become fearful. If there are enough people making noise about where a market’s at, people find it easier to believe. Then, if enough
people believe it, it may come true.

Every top of a cycle sets the scene for the next downturn; each downturn prepares the market for the next upswing.

Every area that booms has to have a breather, and there will be opportunities to get back into that market.

And then there’s the ‘X factor’, and it’s not the talent show.

This time it relates to economic forecasting, when an unforeseen event or situation turns the most well-researched economists and their forecasts on their heads.

Not all have to be negative either.

While the 2008 Global Financial Crisis aftermath was clearly negative, the 2010-12 China-driven resources boom had positive impacts. Interest rates dropping to historic lows is another example of an ‘X factor’. Who recalls ‘Black Monday’, 1987; and then the world economy boomed the year after?

The takeaway message is to align your investment strategy to where any location is in its property cycle, to have the financial capability to ride cycles, and truly understand that property investment is about the long-term.