“The next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war” – Fred E. Foldvary (1997)
In my opinion knowing what the property cycle is and how to use it is crucial for all property investors. By knowing the phases and learning to look for certain signals to work out which phase is on its way investors can make smart decisions about when to buy and when to sell.
It is generally agreed that there are four phases in the real estate cycle and economists have found that a cycle lasts, on average, for 18 years. While it is often difficult to ascertain which phase any given market is in there are certain signals you can look out for that help you to make smart investment decisions.
For many years I have bought and sold prime property, both for my clients, and myself so want to share with you what my experience tells me about the real estate cycle and how to use it to your advantage. Below I detail the four phases, how you can try to identify them and how you can take advantage of them.
Phase 1: Recovery
Typically the most difficult phase to identify, this phase occurs when the property market is recovering from a recession. Demand remains low for quite some time after a recession and few new builds come to the market so it can seem like the market is still in decline or stagnation but by watching for the right signs such as gentle increases in viewings you can start to see when the market is recovering. If you can identify it, this is the smartest time to invest. Investors have to be brave to buy at this point but it can be worth it when the next phase arrives. During this phase investors shouldn’t rely on borrowing to be able to buy because at this point in the cycle banks are often still struggling to recover from the effects of the recession.
To help identify the recovery phase investors should look out for big companies and pension funds buying distressed portfolios. This is a good sign that the market is recovering as these companies have the market intelligence to buy early in the cycle but can’t take too big a risk. Berkeley Group for example announced record annual profits last year but warned in a shareholders note that they would experience a slump in profits going forward because its stock of cheap land was running out. In its note Berkeley says it was able to buy lots of land in prime locations from 2010-2013 (when the market was recovering from the global crash) as it was in a cash rich position compared with other companies.
Phase 2: Expansion
Then comes what is known as the expansion or ‘explosive’ phase where it is obvious that prices are rising so everyone begins to buy again and banks lend again. This phase also brings with it enough confidence in the market that building projects start again and property prices begin to increase faster than wages. Meanwhile smart investors that bought property at the bottom of the market should be selling during this phase. At the phase’s peak property is normally so in demand that even properties that wouldn’t have caught anyone’s attention a few years earlier can often go to sealed bids. For example you may remember the 114sqm studio flat in Fulham that was London’s most viewed property last year due to its £250k price tag.
Phase 3: Hyper Supply
As the explosive phase reaches it’s last few years property investors absolutely want to avoid buying at this time when it won’t be long before the market slumps as demand begins to decline while new developments continue to be completed. In my experience you can identify when this phase has arrived because highly ambitious building projects, planned at a time of high confidence and lending in the market, are announced. Such ambitious projects are often completed after the crash occurs and sit empty. Take the Shard as an example, where the ten luxury flats near the top are still unsold seven years on.
Phase 4: Recession
This phase is when property prices crash, banks withdraw lending, building activity stops and businesses close down, causing knock on effects on the economy. When the recession happens, you will see lots of companies and investors who have over-leveraged themselves go bankrupt which triggers forced selling and even lower prices. This is when investors willing to take on high risk investments can acquire distressed bank-owned properties and partically completed building projects at low prices. Investors with slightly less nerve can wait for signs of recovery, like Berkeley Group did in 2010, and use the money made when selling during the expansion phase to buy low and wait for prices to rise and the cycle to begin again. As no one can predict how long it will take for prices to rise again, investors taking this approach should be prepared to make a long-term investment.
Fiducia Partners specialises in sourcing, acquiring and disposing of prime property all over the word. For help making smart decisions with your investment capital please do get in touch and we will be delighted to talk with you.