Does it really matter where we are in the property cycle?

All economies experience significant changes in their economic activities, better described as economic cycles. There is a period of economic expansion and a period of economic recession, even though the reality is more complex as the cycle does not move in a balanced way.

But how does a property cycle work in the real estate investing world? In property investing, the forces of supply and demand do not work in the same way. This is because the amount of land in existence is fixed. You can’t make up or build up extra land if demand for it goes up easily or quickly enough. The supply mechanism is just not quick enough to balance demand, which makes property prices rise faster than wages do.

Soon enough, people cannot afford the higher house prices and more importantly they can’t afford paying off their mortgages which means they start defaulting on their debt. This causes a hit to banks who have been lending money secured on overvalued houses. The banking system cripples, house prices fall, lending in general slows down all of which have a knock on effect on small businesses, employment levels and other investment markets like the stock market.

Eventually prices drop making everything go back to normal and the cycle starts from the beginning.

Despite the volatile nature of the property cycles, the important point that history shows is that each cycle starts from a higher “bottom” than the previous one, and continues on an upward trend over the long term.

Property Cycle Since 1975

So how do you time your investment in property?

It’s useful to have a sense of where we might be in the cycle in general terms but you do not ever to be investing speculatively. What’s important at each point of the cycle is to either buy below market value or add value through the development.

When you buy and hold property over the long term, it doesn’t really matter of course where we are in the property cycle. When you’re trading/flipping properties over the short term, then you are more exposed to the property cycle. There are ways to minimize the downside risk in these situations – read this article for more information.

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