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Published on 02 Mar 2023
Because, although the housing market is, indeed, tied to the general economy, one can’t make assumptions with property because the real estate market always works in cycles with upswings followed by downturns, regardless of the prevailing economy or political sentiment and certain sectors may fare better than others.
In fact, it’s during a downturn that investors are most likely to be able to acquire a property they may not normally be able to afford and, thereby, be in possession of a very rewarding investment when the market turns again.
The four phases
This is not as difficult as one might think, and the key lies in being able to correctly identify each phase as well as being able to recognise what properties are a good investment and in which areas.
The real estate cycle can provide reliable information about the possible returns of an investment property and there are four distinct phases, each with their own characteristics which are easy to identify if one knows what to look for:
1. Recovery
This is the first stage after a recession and can be a bit more difficult to identify initially because, although the market is in recovery, demand is usually still slow to begin with so it can be a little tricky to pinpoint that recovery has, in fact, begun.
However, this is when many great investment opportunities are to be found and investors who are closely monitoring the data will be able to notice the trends that signal a break in the downward trend. Most notably, there will be an uptick in property viewings and sales and fewer new properties will be coming onto the market.
A reliable indicator is that during a recession, interest rates either decline or, at best, hold steady so you want to make your investment just before they are affected by the turnaround. It’s an especially good time to purchase if you’re a cash buyer.
2. Expansion
This phase commences when the market begins to show obvious signs of recovery, including increased demand for property, steadier job growth, rising rental rates, a revival in new development and the balance between supply and demand is restored.
During this time, renewed investor confidence spurs spending across the board and lending criteria, which would have been tightened during the recession, often begins to loosen.
This is the best phase for risk-shy investors who can capitalise on the higher demand. However, there is a risk of over-extending by incurring too much debt that is not sustainable long-term, especially when the market swings again.
3. Hyper Supply
This is when the market reaches a tipping point, moving from a balanced supply and demand to oversupply. Often, new developments continue during this time when the downturn first sets in and the economy begins to shift into decline.
Available stock and rental rates remain high whilst demand begins to decrease, so this phase is when astute investors should be looking for solid assets with stable tenants and long-term leases already in place. Overconfidence and not heeding the warning signs can prove very costly.
4. Recession
The result of over-inflated growth, often exacerbated by investors disregarding or not recognising the warning signs, this phase is distinguished by heavy supply, high vacancy rates and contraction in rent rates, sale prices and new development. Unemployment also rises and less stable businesses are often forced to close their doors.
During this time, the real estate market becomes highly saturated, but if investors have available capital and are willing to take on higher risks, they have a window of opportunity to reap excellent rewards, especially with acquisitions like distressed bank-owned properties and vacant land developments.
Trend awareness
Over and above a clear understanding of these phases, investors must also do their homework regarding both current and emergent trends in order to make the best investment choices for each phase.
It may seem impossible to believe now, but there was a time when wall-to-wall shag-pile carpeting, avocado-coloured kitchens and bathrooms bathrooms and sponge-painted walls were all sought-after features that would have appealed greatly to the majority of home buyers.
These days tastes and trends are not only very different, but also much more varied. However, what hasn’t changed is the fact that by incorporating current and incoming trends, you will attract more potential buyers and possibly even boost your return on investment.;
It’s worth bearing in mind that the features most commonly at the top of prospective buyer’s wish lists nowadays – and which are likely to remain there for the foreseeable future - are open-plan living areas, lots of natural light and eco-friendly systems which save water and reduce the cost of energy.
And don’t forget that security remains at the forefront of most buyer’s minds, and if they have to choose between two similar properties, they will almost always opt for the one with the best security features.;
So, factors like the garage being separate from the house or a lack of basic security features could easily discourage buyers.
Broad appeal is always better than niche
Be wary of investing in properties that veer too far from the norm because, although many buyers enjoy a touch of uniqueness to set a property apart from the rest, most also don’t want over the top features.
As a rule of thumb, the more unusual your property, the smaller your pool of buyers, especially during slow times.
The ebb and flow of cycles will also be influenced by the economic and political climate of the day, there is always one constant - investors who understand the nature of the market and invest wisely, especially during downturns, almost always reap the best rewards.
After all, there’s a reason that 90% of the world’s US Dollar millionaires became rich by investing in property or including a significant amount of property in their investment portfolios. Property remains one of the best medium-to long-term investments if one is willing to ride out the cycles.
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