For investors and new homebuyers looking to enter the property market, it’s best to take some time and learn about the cycles, influences, and historic trends. Knowing how the real estate market works enables the development of informed investment and purchasing strategies that suit the current market phase and allow people to make strategic decisions.

Property market cycles are one of the general trends followed by the real estate market that can be used to inform strategic decisions. Let’s take a look at it in more detail, including what the stages of the property market cycle are, what drives the cycle and how to take advantage of it.

What are property cycles?

Property cycles happen concurrently around the world and can be seen on a global, national and regional scale. Even within a state sized area, some markets will experience price changes before others. An affluent suburb may change phase earlier than a lower socioeconomic area, and a capital city may have a different cycle to a small farming community.

Let’s take a look at each of the four stages of the property market cycle:

Boom

During a boom there is a limited supply of available real estate which drives prices and demand higher. It can be a strategic time to sell and a poor time to buy.

Downturn

Following a boom there’s a downturn. During a downturn, demand starts to fall causing a decrease in property price. Downturns can happen for a number of reasons, such as an increase in the supply of properties, decrease in lending or a change in the economy.

Stabilisation

After a downturn comes stabilisation. During the stabilisation phase, prices start to level out and often track sideways. Increases are slow and it can present opportunities for investment.

Recovery

Recovery marks an upturn in the market where buyers and investors start purchasing properties. This renewed action causes prices to start rising as the number of available properties decrease, eventually leading to the next boom.

Property cycle factors

There are many factors that drive the property cycle and knowing what they are can help investors identify when a change in the cycle may be coming.

The Economy

The state of the national economy has a large impact on a country’s property market. Generally, when the economy is strong the property market increases, and when the economy is weak it decreases. Consumer confidence, property values, inflation and the value of the local currency are some of the economic factors that contribute to the overall impact on the real estate market.

Interest Rates

The interest rates also have a huge impact on the property market due to the effect it has on mortgage rates. A rise in interest rates leads to a rise in mortgage rates. This causes a loss of borrowing power, which in turn acts as a deterrent for many potential buyers. On the other hand, when interest rates are lower, mortgage rates drop, and people experience an increase in buying power that motivates many to enter the property market.

Government Policy

Governments frequently introduce policies that impact the overall economy. Some of the policies, such as tax credits, subsidiaries, changes in tax rates, and tax deductions, have a direct impact on the property market.

During times when the economy is slowing or has entered a recession, governments can introduce policies designed to encourage people to buy property, resulting in a positive impact on the economy.

Events

At times, a global or regional event can have a significant and often unforeseen impact on the economy, causing a change in the real estate cycle. Examples of this include natural disasters, pandemics and armed conflict.

Demographics

Demographics can have an impact on the availability of property, and therefore the price. For example, an area with a high number of young families may have lower availability than areas with an older population.

Changes in migration can also impact the market, as a greater number of migrants and immigrants can mean less properties being available to buy or rent.

How to take advantage of the property cycle

Understanding the property market cycle is important for people buying real estate for a few reasons.

• Knowing why property values rise and fall allows people to better predict market shifts and gives confidence that another boom will come.
• Understanding that downturns are a normal part of the cycles gives reassurance in the event of a market dip and can assist in developing risk management strategies to minimise losses.
• By knowing what market indications to look for, people can attempt to predict what the market will do in future and use that to guide their real estate choices.

Some stages of the property market cycle have the potential to yield bigger earnings, whether it’s through buying a property that will grow in value or selling one at the height of a boom. Knowing when to buy, hold, and sell is critically important to capitalising on each stage of the cycle. Real estate investors can use their knowledge of property market cycles to their advantage to achieve capital growth.

Here are some of the things to watch out for, which may indicate a downturn or market crash is coming.

• Increasing interest rates is one of the most important indicators that a real estate market crash may be coming. In general, when short-term interest rates exceed long-term interest rates, the economy will suffer which in turn impacts the property market.
• During a boom, house prices can become so high that they exceed inflation and are no longer affordable for the majority. This can signal that a downturn is coming as the high prices begin to cause a drop in demand.
• Shifts in the national economy and GDP that cause a decrease in consumer confidence and disposable income can negatively impact people’s desire or ability to buy and sell property.

Paying attention to the property market cycle and taking advantage of the opportunities it presents is critical for real estate investors seeking long-term success, and homeowners looking for the best time to buy and sell. Without that information, predicting future changes becomes far more difficult.

Author: Bill Kenta is a property investor with a keen interest in long term property investing. Bill is also a retired real estate agent and has mentored many new real estate agents who are new to the industry.