Understanding the phases of the property cycle

During an economic recession, prices start to drop and amateur investors panic and start selling their properties thinking they need to make money before “prices fall any further”. On the contrast, experienced investors see this as an opportunity to get in at rock bottom, and are willing to take the risk of buying up assets while confidence is low. Of course, nobody knows precisely at what point the bottom of the market will be reached. Smart investors are just willing to take an educated guess, based on the knowledge that their upside potential is greater than their downside risk.

As the recovery phase develops, confidence starts to rise and more buyers enter the market. The prime assets (think “London”) are first to go up as this where confidence is strongest. We usually see the big players acting out like big developers and pension funds. The increased confidence has a knock on effect on banks who start lending money once again.

The next phase of the cycle is driven by the heard mentality - when group psychology kicks in and more people start buying properties because they are so accessible to everyone through easier lending. The smart money investors we saw buying during the first phase of the cycle are now selling their assets at a higher price than they originally bought them for, realising substantial financial gains.

This then leads to the winner’s curse phase. Why curse? Because the next recession isn’t far away, and it won’t be long before the asset you’ve bought is worth markedly less. Because the market was being driven by sentiment rather than fundamentals in the peak years, it’s easy for confidence to suddenly evaporate and take the market with it. Prices plummet, and people who are over-leveraged go bankrupt – triggering waves of forced selling. This is when smart investors come in and sweep up the best deals and the cycle starts again.

Things to consider

Property cycles never go smoothly and may have mid cycle dips, but history shows that they always happen. You should learn to observe the world around you and start moving your money at the right time of the cycle. How do you time your investment in property? Read this article to find out more

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