Just like when you keep track of the sun and clouds during the day which can determine when and how you move, you must keep track of the supply and demand factors that are the backbone of the property market cycle. Nationwide and citywide industry economic condition can help distinguish what stage of the cycle is currently in effect right now. Almost all industry market cycles are determined by the health of the economy. The real estate property cycle loosely follows the tides of economy. It loosely follows the economy because even if the economy progresses and improves, the property market may remain strong or may weaken.
Generally speaking, there must always be balance between buying and selling of properties. The trend in the real estate property cycle is that there are certain stages when the supply of properties increase while other stages have increased demands for properties. Investors must be adaptable and attentive especially during the initial processes of a cycle interval, there shall always be opportunities for success no matter what stage of the cycle. To achieve that investment success, there must be various strategies formulated to preserve and enhance your property portfolio.
Property Cycles
What is a property cycle? How does a property cycle work?
A property cycle is a series of recurring events associated with the two factors which are property supply (amount of properties for sale) and demand (quantity of property buyers). The recurring events are reflections of the demographic and economic status of the states and territories which then influences the property market. A property cycle involves a small portion of real estate depending on various factors, whereas a property market cycle (also known as real estate cycle or housing market cycle) involves the residential and commercial real estate industry in general.
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A property cycle is under the jurisdiction of the property market cycle, however the property cycle is more influenced by the area (suburb, city, state or territory), property (commercial or residential real estate), and price point. The property market cycle have 4 phases and the property cycle also follow those 4 phases. It is assumed that one full cycle takes seven to ten years. This is a loose assumption because various factors are taken into consideration for the movement and transition of each phase. It’s not a matter of when would the phase go on, but more like how the phase would go.
The property market cycle may start from a steadily growing population which initiates real estate demand whether they are rental or housing properties. Proliferation of real estate in residential zones drives up the value of existing properties as demand is reaching the upper capacity of supplies. There is a phase in the property market cycle which boosts the price growth in a short amount of time due to demand. As supply starts to lessen, developers shall promptly commence with construction of new properties in order to accommodate the active demand. Even when demand starts to dwindle, there shall be other constructions still under way. This results in an oversupply of housing which ends up with rent reductions and house price slumps.
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There are a lot of people who can benefit from reading and learning the property market forecast; not just real estate agents and professionals of the field, but also property investors, home buyers and renters. There are a lot of signs to look out for and they can be easily used to estimate at which part of the cycle is in operation. Knowing the current situation can dictate your next move whether it is to buy a new property, hold whatever property you have now or sell your property.
What are the phases of the Property Market Cycle/Housing Market Cycle/Real Estate Cycle?
There are four phases to the real estate cycle: boom, downturn, stabilisation, and upturn. The cycle favours everyone because the four phases bring convenience to certain people. The upturn and boom phases give more control of the market to real estate sellers. However, the downturn and stabilisation phases pass the control of the market to real estate buyers. Overall, the real estate cycle does not technically dictate when an investor must buy property or when to sell it, rather it guides the investor how to buy it during the cycle phase.
- The Boom Phase – expansion, growth
Normally, the boom phase is the shortest of the real estate cycle and most times it barely reaches a year span. This is distinctive as well because the property prices will swiftly shoot up without delay. Without fail, boom phase of the cycle is when new generations of investors establish themselves in the industry. New investors are always welcomed no matter what phase, however, the rush of new competitors on the field have brought up the value and demand for housing properties. Developers follow the booming trend and they will immediately try to follow the flow of replenishing the supply for properties. In this phase, majority are in a hurry to acquire properties, but one must not always be swayed by the trends and individual emotions. If property investors were to sell their property during this phase, they make sure that the property satisfies the market’s disposition to ensure that the property is sold more than its previous market value. If investors were to buy a property, they make sure that the property can support itself (still be able to attract tenants) even when the boom phase finishes.
2. The Downturn Phase – hyper supply, saturation
When supply has already caught up to the demand to the point that it’s perfectly balanced, that’s the opportune moment for the next phase to start. Once the boom trend dissipates, it leaves behind an abundance of properties that weren’t sold. The increase of supply and decrease of demand can result in higher vacancy rates, lower rental prices and smaller capital gains. Unlike the boom phase which has a very short and distinct expectancy, downturn phases can last for an indefinite time which is typically a certain number of years. Booms and downturns are intertwined, the longer the boom phase the more drawn-out and intense the downturn phase. Extensions of downturn phase can greatly and gradually decrease property prices. Property investors must enlist the hold strategy which means that they won’t sell their properties, simply just holding onto them through these tough times. During this time, some properties are being sold either because their owners deemed that they won’t be able to do so well in the next cycle or because their owners are in need of cash. Other investors may start to research and analyse properties up for sale at this time, this is to determine if they can acquire these properties and revamp them to suit the next market cycle’s predictions. This strategy replenishes the investor’s stock in time to sell it at the next few phases of the cycle.
3. The Stabilisation Phase – recession, decline
This is the time when the property market’s decline is stabilising. Interest rates are still low in order to give home owners and property investors a little flexibility while vacancy rates are especially high and rent growth is basically non-existent. To entice potential tenants, rental properties reduce their rental rates. Property buyers slowly come back to browse on the market and to start weighing options in regard to promising properties. Even though buyers and demand are slowly but surely picking up again, that doesn’t mean that property prices shall return to normal since they shall be stagnant to an extent until the upturn phase. Investors continue to retain their property holding strategy and starting to buy new properties to add to their portfolio. There are properties still being sold at this phase with big discounts because their owners are in desperate need of money.
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4. The Upturn Phase – recovery, absorption
The upturn phase is the state of positive recovery for the real estate market which can last around three to four years. Rental rates have raised, but rental growth may remain relatively flat. Property values shall strengthen once again since buyers are moderately active and vacancy rates are lower with the surge of incoming tenants. There are still no new constructions since property supplies are plentiful. Some builders may start their housing development processes so that they are ready by the latter end of the upturn phase or possibly the early part of the boom phase. Properties below the market value are fewer than before, but they remain until the turn of the boom phase. Investors make their move to take below-market value properties as early as they can. However, other investors wait up till the presumed end of the upturn phase to acquire these properties in order to stack up house value and ensure that these properties are ready to rent out or to sell again as the real estate market shifts to the boom phase. As the upturn phase concludes, property prices would have risen to a large extent which entails that properties are becoming less affordable.
