It is inevitable that there will be a certain degree of cyclic activity in real estate prices. There will always be ups and downs in the market.

It is often stated that real estate investment is most rampant at times of low interest rates, however in the 80s and 90s the strongest activity has been at times of higher interest rates.

The most important factor in pushing along the cycle is affordability. Banks and financial institutions control prices to a certain extent by controlling the amount they are willing to lend on property. This amount is based on affordability, the borrowers ability to pay mortgage installments as a percentage of their income.

A typical bank is comfortable with writing a mortgage that lets people pay around 30-35% of their wages toward repayments. When the average mortgage repayment substantially exceeds 30-35% of average weekly income in times of low wage growth then there is a high probability of a real estate market correction in the near future. Historically this has been a very good indicator showing the market may be peaking, prices tend to remain at a high point for around two years with repayments exceeding 40% or greater and then decline. Portfolios may be added to or started after that time.

A good shield from cyclical downturns is to purchase lower priced properties in improving middle class neighborhoods where the repayment for a resident home owner will not exceed 30-35% of the weekly wage, this should be your upper cap for the price of your purchases.

Information on average wages and property prices in a given area are available from the Australian Bureau of Statistics.

Lower end property still gains value quite well over time, in line with inflation, but tends to have a far lower volatility in downturns, since wages do not tend necessarily to fall.

It is often investors paying inflated prices for buildings that fuels the phenomenon of a real estate boom, and the return to sensible valuation of land and building that brings about the correction in values. Unlike stocks, real estate does not have a great tendency to become greatly oversold, property values tend to stagnate or fall to inflationary trendlines rather than become excessively cheap, unless you count the sales of desperate vendors willing to sell for below market value when their overly ambitious negative gearing strategy turns disasterously wrong as interest rates increase.

In relation to improved land, ordinary vacant land actually tends to hold up its value quite well, except land which might have attracted the speculator and has a certain rarity value, such as blue ribbon waterfront property or inner city property.

There is a tendency for investors to pay inflated values for premium buildings, laboring under the misapprehension that such residences are in short supply. In reality, because of the high prices only speculators and a very small percentage of home owners are able afford such a home, and so the demand for such property is illusory, a speculator-fueled mirage.

Affordability cushions against substantial falls but also has other benefits. A house selling for $300,000 or more is affordable to less than 10% of the population, but a home going for $150,000 is within the means of just about anyone with a job. When it comes time to sell, more affordable property is infinitely more marketable especially in times that aren't necessarily booming.

Thus, it is usually better for investment purposes, rather than buying a grand palace to invest in a portfolio of more average properties. Not only does this carry the benefits of low volatility and reasonable gains, but also allows you to diversify your portfolio, making local short term problems in the area of one home less significant overall, and reducing the likelihood of an extended period without a tenant.