The All Ordinaries Index started its life at 500 on 31 December 1979. Earlier this year the index was over 6000. However, it did not increase over this period in a neat straight line – there were many fluctuations in share prices on the way.

It is possible to look at a high point of this index before it turns down and then at the next high point. The period between the two can be regarded as constituting a cycle. In the same way one can trace a cycle from one low point to the next low point.

The word “cycle” refers to the fluctuations in asset values about the long term growth trend.

There is no corresponding index for property, but if there were it would show a similar picture. However, it would be a nonsense to describe all Australian property as being represented by a single market.

There are different property markets with their own cycles in the different states; in different classes of property (residential, industrial, shops, offices, rural and so on); and in different categories of locations (central business districts, inner suburbs, outer suburbs, regional centres, rural areas and so on).

In addition, property prices in different suburbs would also experience their own cycles and there would be different cycles for multi-million-dollar properties and the houses owned by ordinary battlers.

Why do such cycles occur? It is easier to explain them for the property market than for the share market. On the supply side, newly constructed premises sell for certain prices while the demand from buyers is there and this encourages further construction. But eventually the supply will exceed the demand and then prices will start to fall, discouraging further construction.

On the demand side there can be similar fluctuations – for example, enthusiastic persons buy shops in order to run small businesses. This works fine for a period, but eventually too many other shops open in the same area and the capital value of shops naturally falls as shopkeepers close their doors and vacate their premises.

Affecting cycles in both the share and property markets are changes in the level of interest rates. These affect investors directly to the extent that they use borrowed funds in order to make investments. Such changes also affect investors indirectly because they change the spending patterns of the customers of companies listed on the stock exchange and of businesses occupying properties.

One factor affecting cycles in the property market is the long time needed for construction. This means that there is usually a lag between demand falling off and construction ceasing in order to restore equilibrium. Interest rates also affect stgelopers. Thus typically property cycles last about seven years, but as the changes in interest rates occur at irregular intervals successive cycles will involve different durations.

The corresponding period for the share market is even less likely to be uniform from cycle to cycle. However, to some extent it is influenced by how long it takes investors collectively, especially during a boom, to forget the last market collapse.

Cycles can also be affected by government measures, such as changes to the levels of protection and changes to the rate of income tax and to tax concessions. These too tale place at irregular intervals.

Economic activity and therefore asset values can also be affected by other factors outside the control of investors and the Australian government, such as changes in the price of oil.

Furthermore, the property market and the share market influence each other in both directions, because investors can switch from one category to the other, depending on their views as to which represents the better value for money at any particular point of time.

It should be noted that the cycles discussed above refer only to the market values of assets; the income being generated by those assets is much more likely to be steady from year to year or to increase gradually, regardless of the fluctuations in the capital values of the assets concerned.