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Invest keeping the property cycle in mind

property bubbleProperty values behave depending upon the phase of the cycle they are in. One of the truly long-standing gospels of property investment is that you should seize a deal at the right stage of the property cycle. This way, you come out paying the best price for a property deal.

At different times property prices may behave differently; sometimes they may languish well below the long-term trend, at other times shoot up a lot higher than the trend or remain closely attached to it. Careful evaluation of the property cycle then remains your first line of attack. Let me elaborate on this.

Boom phase

The boom phase is the most dramatic. As is so often the case with dramas, it is also the shortest of phases. It cannot be sustained for long because prices shoot up uncontrollably. Lot of it is attributable to the buyer rush. No one is too willing to miss out on a deal which his neighbours or friends are latching on to.

In such phases, there is a great likelihood for the rental yields and capital gains to increase simultaneously. Boom phase leads to high level of consumer optimism and rampant construction activity subsequently. What largely follows is a market on an oversupply mode; this chokes demand and creates grounds for return to normalcy.

Slump phase

The slump phase which follows the boom phase is characterised by very high vacancy rates (falling rental returns) and bottoming out property prices. By the time slump occurs, boom time oversupply succeeds in creating a scene where number of homes far exceeds number of those who can buy them at that particular time.

Slump phase of the cycle also introduces a diaspora of payment defaulters. This phase then witnesses more than a fair share of Foreclosures and Short sales.

Phase of consolidation

The earth keeps moving without hiccups largely because it maintains its organic equilibrium. Any calamity is followed by steady reconstruction, one that earth itself does so imperceptibly.

Taking cue from our planet, the property market also indulges in stabilisation after a slump phase. This is not a time of booming prices but a time when the economic dynamics of a nation catches up and tries to minimise the damage of the trough phase.

Phase of Upturn

This is when the property prices get a shot in the arm. Prices begin to move up handsomely and vacancy rates begin to fall. This is the time when capital gains and rental yields move hand in hand and work towards rebuilding the property market.

If you know which stage you are in you would definitely get an insight into the potential of investment. Sometimes, we buy a property only to see the market bottoming out 6 months after our move. There can be so many other reasons where we come out undone by the vagaries of the market. Will it harm us to perform Due Diligence and property cycle research?

Are you programmed to speculate in a bearish market or do you play safe even in a bullish market?