A Property Cycle is simply a term given to the different phases that a property market experiences over time. Ultimately, any one property market will be subject to a multitude of factors that will determine whether prices are going up, down or sideways but the property cycle can give an indication of what is going to happen next.
And of course, if we can predict the future in a property market, there is money to be made.
But take it with a grain of salt as we don’t want to accept the future of the property cycle to be our only indicator of buying a good investment.
If you believe that an investment property will achieve consistent growth every year, you will be surprised to learn that this is often not the case. When “per annum” growth figures are quoted, this is usually averaged out over a fair period of time.
For example, if I say that my investment house achieved 10% per annum over 7 years, it is most likely that there were a couple of years of no growth, maybe even a year or two of negative growth and then a couple of years of bigger growth. This is the ups and downs of investing in property, so let’s break it down:
The Neutral Phase
When property prices don’t seem to move anywhere for a while, the market is generally in balance with supply and demand. At this stage, property is affordable but people may be nervous about future economic conditions.
For example, if financial commentators are saying that mortgage interest rates will rise significantly in the next 12 months or that unemployment is rising, this can cause the market to be nervous. At the same time, there are not a whole lot of people willing to sell as their existing property is affordable.
The Downturn Phase
With good property markets, downturn phases are not too common but they do happen. Unlike the share market which can be quite volatile, the property market tends to be steadier due to the constant need for shelter.
However, when economic conditions become quite bad, downturns do occur. If a downturn is particularly bad, it may be called a “crash” although this is quite rare. For example, some countries have experienced a “crash” during the Global Financial Crisis.
In this phase, property is not necessarily overpriced (although that may be the case) but more the fact that economic conditions mean people have less money to spend on mortgage repayments.
The Upturn Phase
The upturn phase in the property cycle is our favourite. This is when property prices are rising, which may be caused by conditions such as rising wages, inflation or the lowering of interest rates.
Fewer properties available on the market can also mean demand begins to outstrip supply and all of a sudden people are competing against each other to buy a property.
This phase can also have the added effect of people seeing that “property is booming” and they decide now is the time to get in so they don’t miss out on the growth. This further fuels the market and if you’re not careful, you can quickly begin paying too much for your property.
Eventually, property starts to become too expensive and falls back into the neutral phase or downturn phase.
In my experience, each of these phases can last a couple of years and if you happen to have owned a property for 10 years or more, it has mostly gone through all of these phases. One thing to keep in mind is that for any given country, there are dozens of smaller property markets. One particular city may be in an upturn while another is in a downturn, so you cannot apply one property cycle to all property markets.