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Australia began recording housing statistics in 1880 and in that time on a national scale there have been ten property cycles, where we transition from a peak, to a downturn, to a trough, to an upturn and back to a peak. It goes without saying that generally speaking the magnitude of the upturns tend to be greater than that of the downturns, hence in the long term property can be a fantastic growth asset. In fact, the usual duration of an upward market is five years while the average time for a downturn is just three years, making an average cycle approximately 8 years in duration.
What drives this cycle?
- Demand/Supply – Increased demand mainly comes through population growth (including immigration), but can also be due to a rise in first time buyers, all of which can spur the market on. On the flip side whoever a lack of supply of property can also drive up prices as more buyers compete for the one property.
- Yield – Increasing rents will appeal to investors and possibly make the investment viable in the first place due to a lower cost of holding.
- Lower interest rates – lowers the cost of borrowing and usually comes hand in hand with an increase in willingness of the banks to lend.
- The economy as a whole – stable inflation, low unemployment and increasing GDP, all of which we are seeing in Australia at the moment, will drive the property market forward on the back of increased available income and rising salaries making borrowing for a property a possibility.
- Confidence – Perhaps the one thing still slightly lacking in Australia!
Statistics show that on average, residential property owners in Australia have experienced a capital gain on their property equivalent to over 8% per annum if held for the duration of a whole cycle. This is why your Hudson adviser will have been telling you that you must maintain a 7 to 10 year outlook when investing in property!
That said, the phrase “It’s time in, not timing the market” applies just as much to property investing as it does to shares, so ideally we would obviously like to buy in to a market that is recovering from a trough. So what should we be looking out for?
- A rising number of property sales – This isn’t necessarily when it’s a buyers market. It takes two to tango, so what we’re looking for is neither a buyers, nor a sellers market and hence more contracts on the table.
- Rising rental prices – As yields rise the cost of holding the property as an investment falls and more investors start buying.
- More property being built – Often an indication that developers are seeking to supply a much needed demand.
- The beginnings of price growth – the milder the better, but an indication of things starting to move is preferable.
Current statistics show that several Australian cities are experiencing the above characteristics, including Brisbane, Perth and Sydney.
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