Experts say that strong price gains in Sydney and Melbourne property will finally peter out this year, and in line with this, the CoreLogic RP Data home value index has shown very little movement in the last week and month. This comes after 11% year on year increases in both cities.

Additionally, Sydney’s median house price dropped 3% to $1m over the December quarter of 2015, says Domain Group, and so the prevailing view is that the slowdown has indeed set in.

Short-term drops like these don’t always tell the whole story though, which is why some real estate commentators like Herron Todd White (HTW), which is a property valuation firm and advisory, refer to the long-term property cycle to help support more immediate figures. 

"We believe there will be limited growth in 2016 as the market will continue to cool due to a combination of a higher volume of supply, affordability concerns, major lenders increasing interest rates and APRA regulations on investment loans," says HTW. "Property professionals are not seeing this as a doom and gloom situation, more like a market correction after a period of strong but unsustainable growth."

As such, any recent price drops probably won't concern those buyers who approach the market with a balanced view, be it in Sydney, Melbourne or elsewhere. This group generally expect the ups and downs of property and know that they’ll catch another break down the line. That’s just how the property cycle works.

It’s just a question of when

Property prices move up and down due to a number of factors, including the supply of homes in relation to buyer demand, how land is valued, ongoing adjustments to official interest rates by the Reserve Bank, the cost of borrowing money from financial lenders, and the general performance of the economy. Throw in prolonged periods where apartment construction dots the horizon, and you can see why property prices vary over time and between cities. Yes, the pendulum swings in both directions, though it usually takes several years to go from one side to the other.

There’s typically a shift every five to eight years, says managing director of Matusik Property Insights, Michael Matusik, who has looked at the historical numbers to help explain the cycle. 

"Past cycles suggest that residential property appreciates by 8.5% per annum, with five years of upswing - where values lift by 11% per annum - followed by three years of downturn - where values drop by 5% each year," says Matusik. "A strong upswing is often followed by a hard downturn and vice versa."

Consider how some of the capitals have been performing of late, and the cycle can be easier to interpret. For example, until late last year, the Sydney and Melbourne upswings seemed endless, with prices rising as much as 30% in many popular suburbs over 2014 - 15, as per figures from Domain Group. Over the same time, cities like Brisbane and the Gold Coast had been recovering from a lull, marked by a rise in building activity, rising sales, improving rents and a return to price growth. 

The long and short of it

So while it's very easy to get swept up in the day to day reporting of the property market, it provides far less information for an investor to call upon. Indeed many of the short term price movements are due to less predictable trends like consumer behaviour and seasonal changes. For example, springtime auction sales, which are typically fast and furious, can be quickly tempered by rainy weekends. Similarly, prospective buyers might shy away from spending if their local economy takes a hit, such as job lay-offs or a drop in local tourism. It’s also worth considering that many buyers leave the market over the school holiday period in December and January.

Of course, such variables can differ from city to city as well, and in some instances, there is little or no impact caused by such things. As founder of Destiny Financial Solutions, Margaret Lomas says, it's the level of demand that is most important when looking to invest. She says that significant drivers include population growth, infrastructure projects and a booming micro economy. 

"[Price] growth is driven by demand and demand comes when growth drivers are present," says Lomas. "While there may be a distinct property cycle in some of the larger capital cities, largely driven by sentiment more than anything else, investors trying to guess property cycles often end up mis-timing their entry into markets. Many areas do not behave according to any cycle.”     

Some buyers have turned to these other markets because there’s a lower cost of entry, but Sydney and Melbourne remain compelling for others. While it’s increasingly apparent that buyer interest and prices have dropped lately, tight supply in several popular suburbs will surely see continued demand, and therefore steady price levels.

An old rule but a good one

Supply and demand is important to the property cycle, particularly for investors looking at specific areas with building and infrastructure plans in the works. An increase in property supply through new unit builds, for example, will usually place some pressure on real estate firms to sell in order to avoid a glut of supply. If they can’t sell, this can see prices drop more broadly over the longer term. 

As a result, Matusik notes that there's potential for less price growth in the coming years, even decade. He says that due to rising proportion of apartments and townhouses in the housing mix around the country, it will become harder for investors to come by such strong price growth over the course of the next cycle, which will roughly occur between 2016 and 2023 in Sydney and Melbourne, given the 2015 peak in those cities, according to HTW's property clock. 

"In our view, residential property will return to being more about cash-flow rather than largely about capital growth," says Matusik. "The astute will buy strategically for a rental premium and not just buy a generic property in anticipation of overall price growth."

Regardless of how you interpret the cycle, making a good investment always comes back to the presence of growth drivers, says Lomas.  

"Looking for the next growth area is about much more than thinking that it must happen sometime, or the cycle is at the bottom," she says. "Many areas, such as the Gold Coast, can sit at the bottom of a so called cycle for years on end. Growth is driven by demand and demand comes when growth drivers are present.”

By Jean-Paul Pelosi