The Australian Residential Property Clock
Residential property markets follow a clear cycle through a sequence of distinct phases. Let's start at the top. During a period of strongly rising values a number of things happen. Primarily the rate of construction of new dwellings increases.
The reason this happens is that developers and speculators are constantly monitoring the investment equation. They are watching land values calculating if they buy land for $X, expend $Y on construction and sell for $Z on completion, then the difference of course is the profit margin.
When values are rising strongly prospective profit margins are enhanced. When there is a greater potential return, more projects are viable and the rate of construction increases dramatically.
But nobody tells builders, developers or speculators when to stop. Driven by profit motive they keep building as values are rising to take advantage of the strong market.
It's during this phase that media headlines about house prices are most sensationalised and sales volumes are highest.
Copyright. The Real Estate Analyst
The Australian residential property clock was developed by Brett Johnson in the 1980's. Since then we have seen three full property cycles in most Australian cities. Brett constantly monitors where on the clock each major Australian residential market is currently positioned.
As construction of new dwellings outpaces population growth and household formation, there will eventually be a surplus of property and not enough households in the market to buy or rent them and the market will stall.
Values tend to stagnate and with inflation at work real values will fall. Vacancy rates in the rental market will rise.
Developers, and speculators withdraw from the market and the rate of new construction declines. This takes time, as it is not easy to withdraw from the market if buildings have been commenced, so the construction level continues to overshoot for some time.
The population continues to increase with immigration and those reaching household formation age entering the market in their own right progressively absorbing the excess construction. On the cycle goes, until demand exceeds supply, rents begin to rise, the next period of investment opportunity arrives followed by increasing prices as we move towards the next cyclical peak.