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WHAT ARE PROPERTY MARKET CYCLES? How It Helps You To Be An Investor?

what are property market cycles

I guess everybody will agree that in real estate market, timing is everything.

Whether you are a home buyer or an investor, it is definitely a goal to make the most of your property purchase.  Hence, it is important to time your decisions on buying and selling by understanding how the property market cycles work if you want to maximise your profits.

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So, What are Property Market Cycles?

 

Here is the definition from Wikipedia:

property market cycle

From above definition we understand that property prices are strongly influenced by many factors.  Besides the pace of economic growth, bank mortgage interest and demographics factor also play important roles.

Property prices follow a cyclical pattern of ups and downs.  Economist Fred Harrison believed that the average length of a full property cycle is 18 years and each cycle involves 4 phases.

They are:

  1. Recovery Phase
  2. Expansion Phase
  3. Peak Phase
  4. Recession Phase
18 year property market cycle

How It Starts and How It Develops?

In a nutshell, it starts with a growth in population.  As our population increases, the demand for housing will also increase.  When demand is increasing, housing prices will follow to increase.  Both home buyers and investors will see this situation as a good time to buy property as they intend to sell it at higher prices in the future.

With more and more people flipping and speculating in properties, buying and renting become expensive.  Developers will be motivated to build more properties to meet this demand and at the same time to capitalise on the situation.

Having too many construction works will result in oversupply of properties, forcing the prices to decline.  As prices start to decline, investors who are afraid that price will continue to drop will rush into selling, leading to additional supply in the market and at the end of the day, pushing the prices to even drop further.

When market is having a low sentiment, it becomes a buyer’s market.  The fall in prices will make people slowly get attracted into buying again, which in turn moving the market to gradually improve, and the whole property cycles will start all over again.

As you can see now, it is all about the law of supply and demand.

Each property cycle will start from a higher bottom of the previous one, meaning in the long term, the market trend will always be upwards.

property market cycles
Credit: stuartchng.com

Understanding The 4 Phases

Phase 1 – Recovery

Recovery is the phase that succeeds the recession phase.  During this period economic climate is quite steady, property prices are generally flat and market is stable.  However, housing demand is still low and vacancy rates are high.  If we look back, the most recent recovery period in Singapore took place somewhere in 2010 – 2015.

This is actually a good time to buy properties as price is low.  In fact there are a lot of opportunities to spot them sold at rock-bottom prices.  Some investors will be tempted to step back into the market as prices are so attractive.  Those who can identify this opportunity are commonly savvy investors who have been monitoring the real estate market closely.  They could see the indicators showing when the market decline is coming to an end and price will start rising again.

However in reality, it is hard to identify when the market is recovering as in this phase it often feels like still in a recession.  This is why most buyers will choose to stay away from the market as they are worried that it will continue to slump.

Despite that, smart investors find this period could be the best time to enter the market.  While housing demand is still low, they want to take advantage of controlling the negotiation as it is pretty much a buyer’s market.  Furthermore, they are aware that the next upcoming event would be the expansion phase which could reward their investments with good returns.

Phase 2 – Expansion

During this period, besides showing signs of recovery the market is also showing growth and expansion such as:

  • There is a balance in housing supply and demand.
  • Property value starts to increase slowly.
  • Increase in rental rates, decrease in vacancy rates.
  • Construction is on the move again.
  • Steady growth in Job sector.

This is the stage where confidence in economy is slowly restored as people tend to spend more across the board.  As economy activity is picking up, the number of investors returning into the market is getting larger.  Despite the rising in housing price, both investors and home buyers somehow do not lose confidence in buying more houses.  Their high activity in the market will eventually push the demand higher, and at this point many developers will come up with more projects in order to capitalise on the growth of property sales and prices.

Phase 3 – Peak

This phase is also known as explosive or hyper supply.  In Singapore, this phase happened in a period from 2009 to 2013.

Though we do not have a crystal ball to tell us everything, the peak can be identified through these characteristics:

  • Housing will be less affordable as property price increases consistently in a few quarters.
  • There is a significant increase in property transactions as well.
  • High levels of property loan as banks are giving competitive rates to make the most of the situation.
  • Higher activity of new developments.
  • Government cooling measures start to kick in.
property market cycles

As mentioned above, this is the time when developers will start bidding for more projects as sentiment is high.  The situation will soon change from a balance supply and demand to an oversupply in the market.  Prices will then start to lower down as there is a higher inventory of properties for sale than demands. 

While properties are getting overpriced, buyers will continue competing in the purchase.  With banks giving their supports by providing easily available funds, home buyers and investors are rushing into the market, causing the price to explode. 

Humans are social beings with strange behaviours.  When nobody is buying, everybody is afraid of buying.  When people start buying and property transactions start to pick up, the rest will follow fearing that they might miss the boat.  Not to mention newspapers and media will also ‘fry’ the situation with tons of headlines of prices increase and such related issues, triggering a lot of investors to overstretch their spending.

Since price is now booming, existing home owners and developers will continue to flood the market with their properties expecting to get ‘boom’ profits from the sales. 

This FOMO (Fear Of Missing Out) symptom eventually leads to a hyper supply, which finally puts this phase to an end.

Like any other phase, no one can predict how long it will last.  Nobody can tell when the peak is going to end so they could anticipate in protecting their investments.  Unfortunately, peak is the phase which generally tends to be the shortest in the cycle.  Investors who overstretch their capacity will suffer great losses if they do not have holding power.

If you are a home buyer or an investor who bought your property from the previous cycles, this phase will be the best time to exit from the purchase and reap your fortune.

Phase 4 – Recession

It is unavoidable recession occurs as a result of property hyper supply in the market.  The high activity of property owners and developers in the previous phase is now causing the market to suffer from over-inflated growth.

This most unwelcome phase of the property market cycle can be identified by these characteristics:

  • Property prices start to decrease
  • Rental rates are falling as vacancy rates are increasing
  • High rates of unemployment as job vacancies are reduced
  • Businesses close, interest rates high and foreclosure increases

As price is going downturn, more and more people will start selling their properties fearing of more losses.  This is the point where holding power becomes significant.

When recession happens, we will see investors gradually withdraw from the market, home buyers default on mortgages repayments due to over committing during the peak period, bank auctions and fire sales are getting more frequent.

This is the lowest point of all cycles which could eventually hit rock bottom.  Nevertheless, investors who dare to take risks in a property downturn will be handsomely rewarded.

Is It Possible to Time Your Purchase?

When investing in properties, ideally we should always buy low and sell high, which means we should buy during recession phase and sell at peak phase.

But then, it is almost impossible to identify the exact day or month as a fixed point of time when a phase begins and ends.  People have been long debating on which cycle we are exactly at.  Indeed this is something hard to distinguish as it is tough to predict future prices.

how to time property purchase

Some people believe that we can time the market by keeping an eye on indicators, besides mastering the whole cycles of course.  The truth is, applying the property market cycles theory into the actual dynamic market could be extremely difficult.

cooling measures

In addition to that, Singapore property market situation is especially unique because government can disrupt the cycle by implementing a series of ‘Cooling Measures’.

Cooling measures have been used as part of government economic intervention in real estate market since 2009.  It carries a mission to keep property prices increase in line with economic fundamentals, such as income levels.

With that being said, it is still possible to make good property investments at any stage of the cycle.  Although understanding the whole property cycles is important to determine your timing, it is not the only factor.  You need to read more property news and updates on the upcoming supply, demand and government policies.  In other words, keep yourself well-informed as much as you can.

Conclusion

Since no one is able to pinpoint the exact timing of each cycle, how then this knowledge could be useful for us?  Well, when you learn something and understand it well, there are always plenty of takeaways from it. 

Firstly, do not over-invest.  We have seen many inexperienced investors getting burnt due to over-leveraging.  When it comes to investing, prudent is the key.  Do it within your capacity and calculate the risk carefully.

Secondly, do not be emotional.  Being emotional here is referring to panicking and greedy.  As long as you do not over-leverage, you should be able to stay confident even in a downturn period.

You have learnt that the next cycle will always restart from a higher bottom price of the previous one, which means regardless of fluctuations ultimately the value of property increases overtime.

As long as your holding power is strong, all you have to do is to wait for the next cycle whereby it is ‘safer’ for you to sell.

In certain phases when prices keep increasing, rookie investors are often lured to speculate in the market driven by greed.  With property cycle knowledge in hand, the first thing you’ll do is to calculate the risk instead of recklessly jump in.  You will not be acting like a layman because you are familiar with the characteristics of each cycle and regardless of which cycle you are in, it will help you to think and act rationally.

Knowing what property market cycles are and how it works surely give you the ability to analyse the market situation clearly instead of just relying on instinct.  Having this clarity will exclude you from the crowd who rush into buying just because everyone is buying, or panicking selling simply because everyone is selling.

Having knowledge will lead you to wisdom.  And wisdom will teach you not to put too much risk on your investment.

property market cycles

Thinking of ‘Property Wealth Planning’ or Considering to ‘Upgrade’ Your Property?

Drop me a message for a non-obligatory property consultation if you still have questions or doubts.  I am here to help you exploring your best potentials and options, be it for your own stay or investment.

ABOUT ME

Lina Halim is on a mission to assist you in reaching your real estate goals.

As a Senior Associate Director with OrangeTee & Tie Pte Ltd, she takes the time to listen and understand your unique needs, only to plan and tailor a custom strategy that will help you acquire the specific property assets.

Never a fan of high pressure tactics, Lina centers her business on being committed, sincere and genuine with her clients.

She uses her real estate experience and property market knowledge to scope out only the most fitting opportunities for her clients.

Be it a need to get the right buyer or seller, she always put the client’s interest and ultimate goals as her priority.

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