Property Cycle

December 8, 2020 3:24 pm

It’s common knowledge that house prices rise and fall. By understanding the Property Cycle you will enhance your insight into why property prices fluctuate, allowing you to make better educated decisions when it comes to your property investments. You will also gain knowledge surrounding the pattern in which these prices move, preparing you in time. Our article explains the process of the Property Cycle in greater detail.


Prices are kept in check by the effect of supply and demand on the market - for example, if everyone suddenly set out on a health kick and wanted to join a gym, gyms would then increase their membership fees to gain a higher profit from this trend.


These attractive profits would then encourage others to enter the fitness industry by opening a gym, however, eventually supply would then outweigh demand, causing membership prices to be decreased.


Now apply this theory to property. When demand is high people choose to sell their house at a price they will gain a substantial profit, which then inspires others to do the same when they witness these large yields.


For a period of time, wages do not rise in line with house prices, causing property prices to become too steep, meaning demand falls, which then leads to the bubble bursting. The bubble burst causes banks to stop lending, construction to seize and businesses to close.


This acts as a reset to the property market. As no-one is buying, prices decrease, which then influences people to buy again, restarting the process.



The Process







We start at the recovery stage. At this stage, investors who are willing to take risks are buying. These investors often use their knowledge to spot opportunities at this phase, predicting that their risk is lower than their potential.


As this phase progresses, investors’ confidence will grow, generating more house sales. These sales will lead to house prices increasing over time as demand begins to grow again. Rob Dix advises “look out for big companies and pension funds starting to buy up distressed portfolios ... it’s a good signal of the recovery solidifying”


The cycle then moves onto the explosive phase. In this phase, prices begin to creep up again, reinstalling lenders confidence. The reintroduction of large scale lending and investing encourages business growth and construction to begin again.


It is then at this point people are misled by information and presume as everyone else is investing that this is the correct time for them to invest. It is at this point we head towards the end of the explosive phase - banks are lending too much and people are buying assets they typically can’t afford.





This part of the cycle was labeled “The Winner’s Curse” by Fred Harrison. This stage of the cycle gained its nickname as we approach the fall of the economy and hit a recession, therefore, those who “win” the property bid are now left with an asset which is now unfortunately worth less. Ultimately, the effect of this is people who are overstretched financially become bankrupt and confidence in the market evaporates.


While it seems the economy will never recover from this phase, the world is slowly working towards rebuilding and reaching the recovery phase once again.



How to Use the Property Cycle to Your Advantage




By understanding the Property Cycle you provide yourself with an advantage.


When you begin to notice prices rising and dipping you will have the knowledge to identify what may be approaching - allowing you to determine the right time to make your property investment. You will hold the ability to apply what you have learned from the Property Cycle to potentially analyse the state of the economy - placing you ahead of “amateur” investors already.


Knowing the route the Property Cycle is likely to take can allow you to project which stage is next. This will grow your confidence and allow you to make more level headed decisions when it comes to buying or selling property. This knowledge will also allow you to identify which investment strategy is best suited when the time is right - a buy-to-let investment, a flip investment etc.


There will be hints along the way which will allow you to identify which stage the economy is in. This will highlight to you whether it is the right time to buy, sell or hold off completely.


Remember, don’t follow the crowd.


Don’t sell because house prices are beginning to decrease, hold off until the right time as you know that they are likely to recover in the approaching phases. Be sure to wait until the right point of the cycle before you consider selling.


Do the opposite of the crowd. Buy when everyone is selling and sell when everyone is buying.






Conclusion




The Property Cycle begins in the recovery phase - the point where the economy begins to spring back and the world starts moving again. The cycle has identified this is likely the right stage to begin investing in property as this is when “smart investors” make their move.


As the cycle moves on we reach the explosive phase, people begin to follow the trend and sell their house, meaning as competition grows, house prices increase. This brings its risks though.


In the later years of the explosive phase, prices increase quickly while wages remain the same, meaning people can’t afford these houses and lenders begin to get nervous and restrict their lending.


As we reach the recession people are now left with assets which won’t perform, have reduced in worth or won’t sell.


Having knowledge of the Property Cycle may not guarantee you success, however, by having the knowledge of how the process develops you will be able to predict which stage we are at in the process.


Having knowledge of the Property Cycle may not guarantee you success, however, by having the knowledge of how the process develops you will be able to predict which stage we are at in the process.


This will allow you to potentially identify what you should be doing while investing.


Disclaimer: This is information based on our knowledge gained throughout years of experience, education and learnings. This information is open to interpretation, therefore, you must carry out your own due diligence regarding the subject.

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