Riding the waves of the property market

The property market is well recognised as having distinct cycles. As buyer demand grows and then eases, supply matches the demand and then eases and consequentially prices rise and then ease, and of course such cycles can, and have often gone into reverse.

However I think there is also a kind of wave-like nature to property markets. Bursts of activity tend to start in a particular suburb and then a ripple effect spreads outward affecting other suburbs gradually.

Look at Auckland over the past 5 years. Once the market has regained confidence by 2010 following the market slow down of 2008 as a consequence of the Global Financial Crisis, we started to witness this ripple effect. The suburbs that started to see the earliest activity were the more diverse suburbs around the inner edge of the CBD. Such suburbs by the nature of their somewhat eclectic stock mix of rental properties, owner occupier properties, run-down properties as well as some semi-commercial properties became of interest to the first wave of buyers who were canny enough to see the potential of how the market would recover and develop in the coming years.

As examples think of suburbs such as Grey Lynn, Ponsonby, Kingsland, Sandringham, Greenlane, Onehunga, Three Kings. These early adopters / investors became active in the market in these suburbs buying up property and starting to improve them, undertaking small make-overs up to large renovations. The attraction for these early entrants was the location and the potential. This renewed activity in these suburbs brought confidence and with this came increased demand which triggered an increase in the pace of sales and then came the property price rises.

However as ever the one true fact of property is that there is only so much of it to go around - especially when you look at a particular suburb. So as a consequence, those for whom the level of demand was excessive especially as it drove up prices, did the smart thing and started examining bordering suburbs, ones that exhibit the same characteristics of an eclectic mix of stock. So the cycle begins again in these suburbs and at some time the ripple moves outward from the centre to the furthest suburbs. However as it spreads the scale of the impact on demand and prices eases, just as you find with a wave on the sea, the further from the centre-point the more the scale of the wave dissipates.

Continuing the analogy of the waves further; reflected waves start to occur whereby as the primary starting suburb as we described early blossomed, so its effect was felt somewhat more gradually in neighbouring suburbs that has a more established and represented a somewhat less eclectic mix of properties - I am thinking here of suburbs such as Herne Bay, Remuera, Epsom and Mt Eden as the neighbouring suburbs to Grey Lynn, Kingsland, Sandringham, Mt Wellington and Greenlane. As the regular refrain goes “a rising tide lifts all boats” - however in the case of property some boats rise more than others primarily as a function of their location.

So what does this analysis and analogy tell us about property cycles and how might this understanding better inform property decisions in the coming decade in the Auckland market? The first thing to note is as stated at the beginning, property markets move in cycles and it is highly likely that at some stage the whole ripple effect will be repeated from the self same suburbs once we pass through a somewhat quieter period of the property market into which we are likely to be entering at this time. Secondly as Auckland continues to grow to the expected level of 2 million population or more then there will be suburbs which match the eclectic mix seen in these inner ring of CBD suburbs which are likely to be located around future nodes of population growth or better thought of as satellite CBD’s around the larger Auckland region. Spotting these opportunities are likely to be the real golden nuggets of the next decade. It pays to spend time walking the streets to get a sense of what is going on in a particular suburb, far more reliable than driving around. Look for signs of new commercial projects and renovation. Look for improved infrastructure and public transport improvements. Try and visualise how the area might look in 5 years time and see if there are major negatives that will hold the areas back.

It’s not easy to predict with certainty, but over time you can develop a sense of it and these property cycles are not that fast in developing so look for the signs and follow your instinct, over time it can be reliable.

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