The Correction

All property markets go through periods of expansion and contractions. In this article, we will examine what is defined as the contraction or correction period and the average correction for all 5 major Property Markets of Australia. 

A price correction is best defined as a period of time (at least 2 years) where prices under perform inflation. In some cases we also see prices soften and historically (back to 1960s) we have seen price falls in the major capital cities up to 10%. Corrections are necessary for the markets to normalise and find its new equilibrium point after rapid price appreciation. 

The most frequent tipping point for a market to turn into a correction is simply that prices are not longer affordable: demand decreases, supply increases, speculators and investors leave the market and prices soften or in some cases fall. Since the 1980’s, the average correction period for all major 5 major capital cities has been 3.98 years - with a tight range of 4 to 7 years, with prices declining on average of 5.74% (up to 11%) during this period. 

Last correction for 5 major capital cities 

- Sydney’s last correction period was from 2004 to 2009 with a price drop of 5% in one year alone, during the correction period prices increased a total of 0.19%. Affordability index (the measure of average household income towards the average

mortgage at loan to value ratio of 80% and current interest rate) was at 57% in 2004 and went down to 36% in 2009. It currently sits at around 60%, this is a sign the market has peaked, is very unaffordable and arguably going into its next correction. - Melbourne’s last correction was from 2010 to 2013 with a price drop of 8% in two years and 0.18% total growth over the correction period. Affordability in 2010 was at 51% and went down to 34% in 2013. Melbourne’s current AI for houses is at 44%, indicating that property prices are approaching a natural affordability ceiling. - Brisbane’s last correction was from 2008 to 2015 with a price decline of 5.31% in one year alone. Affordability in 2008 was at 55% and went down to 27% in 2013. Brisbane’s AI is currently at 29% showing this market is affordable and still has room for growth. 

- Adelaide’s last correction was from 2008 to 2015 with a prices moved 3% over the period. AI in 2008 was at 50% and is currently at 27% 

- Perth’s property prices are the same as 2007, AI in 2007 was at 54% and now at 27%. This could arguably mean that the market has bottomed or is close to the end of the correction. 

Corrections are part of the property cycle and every market goes through a correction at some point in its cycle. Typically when a market becomes unaffordable is a sign that the market will need to go through a correction, and as the data has shown this period can last from 4 to 7 years. Therefore, understating property corrections is important when making a buying or selling decision and the timing of your purchase or sale of a property can be the key to maximising your return or investment or experience significant loss of capital.