Understanding the Property Cycle puts you in a position to buy and sell at the right time. While it’s easy to get swept up in the whispers and news reports, it’s important to know how to identify which phase we are in, and what is likely to happen next. Being well-informed gives you the best chase of making a smart investment.

A Bust is when prices fall below where they peaked in the last weeks, months or previous 6-12 months. Potentially, this is the best time to buy as prices are low and everyone is scared it will get worse. 

During this phase we are in a downward economic cycle – businesses are feeling the pain of decreased income, job losses are on the increase resulting in less customers. Finance becomes harder to obtain, banks close shop as they wait to see what happens and this leaves buyers and sellers alike feeling nervous. We see less auctions, more conditions, later settlements and longer buying time. With less buyers and more sellers a lot of properties go unsold as sellers can’t bear to sell below their expectations.

During this phase, smart investors hold onto their property. Defaults are much more likely to happen and mortgagee auctions can result. We start to see a real ramp up in media negativity which sets off a bout of panic selling (usually due to poor investing), experts talking down the prospect of property investment and people looking to other investment options.

Development slows as people wait to see what happens and if they can’t get finance or pre-sales, some go bust, finance companies go bust, projects are discontinued or taken over by someone else. The whole economy is in a major slump.

How to take advantage of a bust cycle and not get caught out

After the bust, comes the recovery phase and new life in the market. There is still lots of uncertainty, recessionary traits, increased demand for buying, yields/rents start to trend upwards, immigration increases and development increases as demand increases. We find finance comes back into play and buying becomes a much more desirable option over renting as values stabilise and start to creep upwards.

As recovery kicks in and we head towards a boom, prices start ticking up and you guessed it, the media once again talk more positively about investment and buying property.

Now is the best time to buy if you’re a long term investor

Bust markets can be short and it’s hard to gauge when the recovery phase has kicked in as it happens quickly. Timing is everything and you want to get your finances ready so you’re ready to buy at the start of the recovery phase.

Understanding the cycles and keeping your finger on the pulse means you’ll be able to better read the market. It can be difficult to tell you’re in a recovery phase when it’s happening but analysing historical recovery periods will help. While you wait for the opportune time (this could take five years), get your finances in order so you’re ready. For investors with lots of capital and resources, any time is a good time to buy if you buy at the right price.

Something to be mindful of is different cities go through the cycle at different times. History shows Auckland is usually the leader, with other cities following. Major centres will be impacted first with the wave flowing out to smaller cities and towns.

Next time… we’ll take you through the signs that recovery is well and truly underway and how to navigate a boom! And if you missed it, here’s our first instalment The Property Cycle part 1.