Signs of a boom cycle

It's simple to spot a boom cycle retrospectively, but predicting which areas are set to surge is much more difficult. Although there's no certainty that property prices will rise or fall, it's important to be aware of the signs of a boom cycle.

Supply and Demand

The key to understanding a boom cycle and making a good investment revolves around supply and demand. To put it simply; as supply exceeds demand, prices fall, and when demand exceeds supply, prices rise.

According to CoreLogic, the balance of supply and demand generally dictates housing values. Therefore, it's necessary to understand what influences this balance. Tim Lawless, CoreLogic's Research Director, says "watching out for factors that could affect either side of the equation is essential to getting ahead of the curve".

"On the supply side, markets with a shortage of supply, either advertised supply or newly built supply, can be easy to find. For example, CoreLogic tracks listing numbers closely, as well as building activity, to gauge market supply.

"Scarcity of supply amidst rising demand can cause prices to rise."

Real estate demand can be harder to analyse and identify as there are more factors that impact this side.

"Demand can be influenced by migration trends, investor activity, monetary policy factors such as interest rate settings, finance availability and government incentives such as stamp duty concessions or grants. Large infrastructure projects such as new gas refineries, or mining projects can have a sharp but temporary influence over demand, often amidst tight supply constraints," says Lawless.

What are the signs?

It's impossible to predict a boom cycle with 100 per cent certainty, but there are key signs that may point towards rising house prices. As the relationship between supply and demand is constantly changing, there are ways to stay ahead of the market by understanding certain indicators. According to Lawless, there are five key signs that the market is set to boom:

Diminishing inventory levels amid Rising Buyer activity

As demand is increases and supply drops, available housing will most likely increase in value. For example, an influx of interstate migration has seen rising buyer activity in Queensland. Partnered with an 11.3 per cent drop in the number of listings, this rise in buyer activity positively impacted housing prices. This can be seen as the median sale price for houses in Queensland rose by 1 per cent in the 12 months to September 2020, according to the latest Queensland Market Monitor.

Shortening Selling times

This represents a clear spike in demand and is another indicator that prices may rise. When properties spend less time on the market, it's clear that the demand is high and may lead to shortening supply levels if the market doesn't accommodate. The impact of shortening selling times could be seen on the Gold Coast throughout the September 2020 quarter. The annual median house price in this area grew by 3.2 per cent as the annual median days on market dropped by 12 days.

Narrowing in vendor discount rates

High discount rates often mean that the market is weaker, and the demand is lower. Whereas, low rates usually mean that there are more people looking to buy. This competitiveness results in narrowing vendor discounts as there is less of a need to incentivise buyers. With properties in regional Queensland growing in price, the median vendor discounts in these areas have dropped significantly compared to other areas. For example, Rockhampton saw an annual house price growth of 6.7 per cent, while the vendor discount rate dropped by 2.2 per cent.

High Auction clearance Rates

This generally means that the market is growing. It shows most buyers are willing to pay the sellers reserve price or more to be the highest bidder. This represents another indicator of increased demand and will generally mean that house prices are rising.

Falling interest rates and improving credit availability

The falling interest rates and improving credit availability is a sign that house prices may rise as it's much easier to borrow and invest. Historically, Australian house prices have responded positively to this. Additionally, falling interest rates make investing more achievable, and gives first home buyers more of an opportunity to enter the market.

Important Disclaimer: This article is provided for general information only, and the author is not engaged to render professional financial advice or services through this article. All opinions provided are courtesy of CoreLogic. Readers should satisfy themselves as to the correctness, relevance, and applicability of any of the above content, and should not act on any of it in respect of any specific purchase, investment, or other financial activity without first obtaining their own independent professional financial advice.