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Riding The 18 Years Property Cycle

Property is not only a living necessities, but it’s also a commodities which exist in the nature property cycle due to the economic principles of supply and demand aside from the influence by human factors, political, demographic, and socio-economic factors.

Sales in the real estate market, land purchases, and new construction are important to the economic indicators and playing an important role in downstream industries chain such as home appliances, furniture, renovation, banking, construction, building materials, glass, and cement. 

From the perspective of driving economic growth, both in developing countries and developed countries, real estate industry has played a vital role in the macro economy no matter the prosperity of economy or recession is also related to real estate industry, such as The Lost Decade of Japan in 1991, Asian Financial Crisis 1998, and subprime mortgage crisis the United States in 2008.

Cypriot British economist Fred Harrison studies the pass 200 years real estate market and finds that the fluctuation of property price is related to the 18 years property cycle.

The first 7 years of slow real estate market growth came from the increase in housing demand for ordinary people. During this period, the growth rate is stable, about 6-7% per year. 

The first batch of the home buyers found that the previously purchased houses have now appreciated a lot, and began to sell it. The increased of market supply will cause the real estate market fluctuated slightly.  When they saw the first batch of home buyers make a profit, investor began to buy real estate for investment purposes, triggering second round of property price increases and faster than before which mainly driven by speculative purpose. Annual capital appreciation can increase more than 10%.

Banks will following the trend and releasing more and more loans. The more hot money that flocks to the property market, the faster the price rises, and the more people buy. At this time, house prices have been rising for more than 10 years, and many young people who have begun to consider buying a house do not even have a personal memory of the decline in house prices and thinking that house prices will not fall. But don’t forget that this round of housing prices is mainly driven by speculation rather than actual demand. Gradually, house prices began to be ridiculously high, and the working adult could not afford to buy the house. The price began to go down and entered a long four-year down period.

The biggest hit during the downturn was the one who bought homes with the highest price loans. Those who could not afford to pay back the loans began to declare bankruptcy, abandoned project, and the property market was in depression. Harrison called the last two of the seven years of the second round of madness “the winner’s curse.” The house prices will soon start to fall and adjust to meet the market demand.

Real estate market will slowly recover with the incentive and stimulus package and enter the next 18-year cycle.

What you can learn from the property cycle:

👉   Recovery phase prices usually start higher than during the last recovery.
👉   Property cycles have different time variances in different countries.
👉   It is normal for property prices to go through ups and downs.
👉   Buy at the bottom of the cycle and sell at the top of the cycle.
👉   Do not over-leverage at the peak point of the property cycle.
👉   Do not panic sell when prices are dropping.
👉   Be a seller when everyone else is buying
👉   Be a buyer when everyone else is selling

Reference:
https://malaysia.fang.com/news/10582204.htm
https://zhuanlan.zhihu.com/p/35559542
http://opinion.jrj.com.cn/2018/02/22090724134259.shtml
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