Understanding housing investment cycles

The holy grail of housing investment might be summed up as: when do I invest and where?  If only it were that simple. Unfortunately, housing investment cycles in Australia are increasingly complex to understand as the economy evolves from the recent mining construction boom into a global services economy.

The reason why it’s becoming harder to understand is because it is becoming harder to see.  When the mining boom was in full swing, we could clearly observe the geographic location of the activity.  For example, it was happening in the Kimberley and in Broome in western Australia, and it was happening in central Queensland.  The activity was intense and specific to mine locations, making it easy to understand from a geographic perspective where demand actually occurs.  And it happened in a relatively short space of time so investors got quite excited.

Investors are not so excited today as that mining construction boom is finished.

Now as we move into a global services boom, it’s not so easy to spot where exactly the action is taking place.  In the services sector, people are working jobs in finance and professional services.  They are working in scientific services, in health and education.  The location of activity changes dramatically and is not as distinct or visible.

Further, if we looked at the eastern seaboard and tried to figure out where the capital cities are in the housing investment cycle, we’d see something quite unusual and perhaps surprising: There is no one trend covering these east coast cities.

The cities are out of sync with each other and at differing stages of the housing cycle.  In Melbourne, apartments off-the-plan to resale prices have already dropped by 12%.  While in Sydney, prices have still been increasing but sales activity figures have halved in the last quarter.  And Brisbane has seen a relatively strong performance in the past year and a half but prices are now declining.

Melbourne is in a very mature phase of its investment cycle and is confronting double the average annual number of settlements.

In an investment cycle sense, Brisbane is probably 6-12 months behind Melbourne and sitting somewhere around the beginning of the mature phase of its cycle.  Sydney is at the middle phase of its cycle.

It’s understanding where we are in each of those cycles and the geographic impacts and implications that allows us to invest wisely.

Interest rates are a key driver of economic cycles and, one thing we can be sure of is that interest rates are likely to stay at ultra low levels for a very long time.  They should remain at or around the mortgage rate of 3.5 to 4% until 2018 or 2019.  This is because the Reserve wants to keep the Australian dollar low in order to generate business investment activity and so that we can be internationally competitive. Business investment activity is currently very weak and if that dips, then employment drops, causing a further decline in investment.

So when and where should you invest in residential property?

My advice is to take a good long look at the housing investment cycles.  And then look at the ABS releases and Reserve Bank chart packs which summarize macroeconomic and financial market trends.  I check out the data every weekend.  With a cup of coffee, they provide a very tasty, quick graphic view of the economy.  Then you’ll be well-placed to de-risk your investment as much as you can.

About the author: 

Brian Haratsis is MacroPlan’s Founder and Executive Chairman. Brian is an economist and future strategist with over 30 years experience as an advisor to governments and major corporate clients throughout Australia and New Zealand. For more information or to discuss your property research requirements, please contact Amy Williams on 02 9221 5211 or amy.williams@macroplan.com.au.