The property market typically moves in cycles. Investors who understand this cycle are often best placed to seize opportunities that others – acting on instinct – may miss, while also avoiding pitfalls, too.
What Are the Phases of the Property Cycle?
The property cycle can be used to help predict the rise and fall of property prices over time. It has three phases: recovery, boom and crash. During the first stage (which begins after a market low), prices begin to stabilise and climb as buyer confidence returns – cautiously, investors re-enter the market. The boom phase is one of rapid growth, with property prices soaring as increased construction, speculation and lending fuel the market; both investment activity and risk peak. Finally comes the crash stage, where overinflated property prices trigger a sharp correction, with lenders tightening credit and investment coming to a halt.
The ‘Winner’s Curse’
According to the theory behind the 18-year property cycle, there is a period towards the end of the boom phase known as the ‘winner’s curse’. This is where a feel-good factor takes hold, with people believing the cycle of boom and bust has permanently ended and that property prices will continue to rise, indefinitely. This, in turn, can lead to investors and buyers paying over the odds for property. During this time investors may also become less cautious and, therefore, more susceptible to scams.
What Causes the Property Cycle?
Real estate experts, like Emile Salame, understand that the property cycle exists due to several key factors, as well as the general push and pull of market demand. These include the fact that there is a finite supply of land, with scarcity increasing prices over time, and a constant demand for housing. Investor psychology also plays a major role, with optimism fuelling property investment and pushing prices up during the boom phase of the property cycle. The property bubble bursts when prices outpace most people’s wages, resulting in a market correction.
Is the Property Cycle Guaranteed?
The 18-year property cycle theory is not guaranteed to always happen in the same way, but it offers a framework that can be useful to understand the broad market dynamics. However, it’s crucial that investors understand all the factors that contribute to the impact and duration of each of its stages, such as demand, interest rates and economic conditions. For more information on the property cycle, take a look at the embedded PDF.
