What is a Property Cycle

The property market sees a sequence of recurring fluctuations, upswings and downswings in its demand and supply, in the same manner as other markets. This sequence can be attributed to a series of social, political, economic and other factors, and form what is called the property cycle. Over the years, by closely watching the property market’s demand and supply patterns, it has become possible to find a predictable pattern in the cycle, which includes three main phases, namely, boom, slump and recovery, before the boom sets in again. Each of these phases is characterized by a specific price trend, and varying demand and supply patterns. These phases follow in the same sequence without any possibility of change, and past cycles bear testimony to the fact that a slump is always followed by a recovery and boom always precedes a slump. It is for this reason that it is termed cycle since it always comes back to the same point in the same sequence. However, the property market cycle is a free market phenomenon and cannot be seen in controlled markets where external factors, like governmental control intervene to change the trend in the market.

Phases in the property cycle

  • The boom is a phase in the property market when prices rise, and it is not easy to sell property due to the high prices, rents go up and become difficult to afford. The yield becomes lower since the rents do not rise in the same proportion as the property prices. Sales are fewer, even though property financing becomes easier to get. Speculation about price levels pushes the prices even higher, and people begin to feel this boom will never end. Despite the fact that people know about the property cycle, they are convinced during each boom that it will not end and a slump will never come.
  • A slump is inevitable after the boom phase. The prices that have risen to exorbitant levels begin to fall, and the slump actually sets in long before people realize or notice it. This can even take years since the principal drivers of the shifting trends are difficult to notice. A slump is the longest phase of the property cycle, though experts believe that the higher and bigger the boom, the longer and lower the slump. A slump may not always see a crash in prices of property, and may simply keep price levels stagnant. Other characteristics of the slump include, higher levels of vacant properties, lower cash flow for real estate investors, prices fall in value and price growth is stagnant. Additionally, forced or distressed sales are common, a sale takes much longer due to low demand, and property finance becomes more and more difficult to procure. People who had invested in property as an investment find ways to sell it off, and cut their property portfolio. The hype about high prices is substituted by a feeling of gloom and pessimism.
  • Recovery phase is always shorter than boom and slump and is marked by a switch towards rising property prices, demand picking up, financing becoming available, and property value growth has people wondering whether it is just a bubble or it will be sustained.

A property cycle or the sequence in which prices, demand and supply levels move, is dependent on a series of other factors all of which have a role to play in rising and falling levels of price and demand. These include demographic factors, and market related factors like property availability, interest rates, inflation, laws and regulations and so on

Tags: ,

About Property Tutors

“PropertyTutors Limited believes the information in this publication is correct, and it has reasonable grounds for any opinion or recommendation found within this publication on the date of this publication. However, no liability is accepted for any loss or damage incurred by any person as a result of any error in any information, opinion or recommendation in this publication. Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to buy, sell or retain any investment in or make any deposit with any person. The information contained in this publication is general in nature. It may not be relevant to individual circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. This publication is for the use of persons in New Zealand only. Copyright in this publication is owned by PropertyTutors Limited. You must not reproduce or distribute content from this publication or any part of it without prior permission.”