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Riding the boom-bust cycle

IT has been well reported in the media that Perth’s real estate market is enjoying rapid growth. Those in the industry believe housing prices are set to increase in the near future, due to a combination of low interest rates, the first home buyers’ scheme and high consumer confidence.

We’ve seen this cyclical boom and following bust before, most recently in the late ’80s and early ’90s, and the industry is familiar with the up and down movement of prices. But very little data has been collected on the cyclical trends that occur within a calendar year.

Real estate agents would be familiar with the yearly cycle whereby real house prices are highest in the first quarter of the year and lowest during the third quarter.

I recently undertook a case study of Perth house prices from 1988 to 1995 and found price changes were, in general, 2 per cent higher in the first quarter of a year than the annual average and 2 per cent lower in the third quarter.

So what causes higher demand for housing in the summer months? The most likely explanation relates to yearly work patterns. Most people have holidays and there are extended school breaks during the summer months. It is likely that many housing market partici-pants plan their market activity to coincide with these periods and there are resultant varia-tions in demand and supply for housing services during these periods.

This explanation is consistent with results from similar studies in the Northern Hemisphere, with strong seasonal influences recorded in the second and third quarters. This corresponds with the Northern Hemisphere sum-mer and long summer break between school years.

It is interesting that the Australian study found the lowest volume of house sales to be in the fourth quarter, which is consistent with some studies of the American market and can be attributed to the influence of the Christmas period.

Evidence from 1988-95 Perth house sales shows January, February and March are the best times of year for sellers looking to get the highest price possible. Naturally, the increased demand is accom-panied by increased prices. A plausible explanation for the decrease in prices during the winter months is that more homes are for sale for longer periods. Sellers are more willing to accept lower prices in winter because of the lack of demand.

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