Timing property cycle can double investment returns
By timing the property growth spurt that happens for a few years each decade in every capital city, property investors can maximise their potential returns.
Some property investors buy the right property at the wrong time.
While property prices have consistently gone up over time, it doesn’t happen in a consistent and linear pattern.
What they tend to do is move in cycles; experiencing low to no growth for a time and then a surge of growth in a short period.
There is a rhyme and reason to the market and if you know when the ups are coming, you can pick up a significant advantage as a property investor.
The median house price has approximately doubled every 10 years in each of the main capital cities. But by studying the numbers what we actually find is that 60-80 per cent of the growth occurs in a two to four year window. This is called a ‘growth cycle’.
If we look at the last 50 years of property price data, we can observe some interesting trends in relation to these growth cycles. I focused on the five main capital cities of Australia - Sydney, Melbourne, Brisbane, Adelaide and Perth - and found two specific takeaways.
For context, a growth cycle constitutes two or more consecutive years of double-digit growth (ie greater than 10 per cent per annum).
Takeaway 1 - Diversify
As a property investor, the first takeaway is to ensure your portfolio is diverse. Over the past 50 years, each of the capital cities have experienced growth cycles at different times.
By owning property in any of these five main capital cities, you would see a growth cycle for at least two years every decade. However, if you own property in each of the main capital cities, over a 10-year cycle you would have observed growth on your property in 7 or 8 of those years.
Takeaway 2 – Identify the start and act early
I also found there is a predictable pattern to the growth. The Sydney market typically undergoes a growth cycle first, followed shortly after by Melbourne, and then following that the smaller and more affordable cities.
This makes sense because demand for housing comes from population growth and at least 60 per cent of all overseas migrants choose these capitals as their destination.
As the populations grow in Sydney and Melbourne, they typically have too big a population, become less affordable and infrastructure is stressed. During this time, interstate migration increases significantly as people look for a more affordable place to live, often opting for the smaller capital cities in Brisbane, Perth or Adelaide.
As a property investor, it’s important to invest in the right city at the right time of its cycle.
Don’t underestimate the significance of this. The Sydney and Melbourne median house prices doubled between 1997 and 2003, and the Brisbane and Adelaide median house prices doubled between 2002 and 2007.
Diversified property case study
Paul invested smartly, making the most of growth cycles and in 21 years has grown his portfolio to 13 properties.
Paul began with an investment of $150,000 into three properties; one in Brisbane in 2002 followed by another two in Brisbane in 2004.
Two decades years later, Paul now owns 13 properties in Brisbane, Melbourne, Sydney and Perth which are worth a combined $10.62 million.
Paul took advantage of two key growth cycles. The first was in Southeast Queensland from 2002 to 2007. He the invested in Perth in 2005, Melbourne in 2009, Sydney in 2011 and Melbourne again in 2015.
By observing growth cycles and relying on the numbers (again, there is only truth in numbers), Paul was able to grow his portfolio very quickly and successfully.
