Part and parcel of being a successful property investor is knowing when to buy, when to sell and when to hold. Every property market in the world goes through the 18-year property cycle otherwise known as the invisible market gauge that charts the cycle between booms and troughs.
The basic premise is that investors will buy when all of the messages about the property market are positive, which results in a seller’s market and they won’t invest when the messages are negative, creating a buyer’s market.
The property market tends to move in cycles around 15 to 20 years, where property prices rise for 10 to 15 years and then decline for around five years and then the cycle begins again.
According to the theory, there are four distinct phases:
The Stealth or Opportunity Phase, otherwise known in economical terms as Decline, where prices have crashed and further falls is expected. Here, brave investors scoop up properties at bargain prices. Sellers who don't need to sell hang on to their properties, which creates a lack of supply, and gradually pushing house prices up again.
Economically speaking the Decline phase then enters in the Absorption one otherwise known as The Awareness or Upturn Phase where property prices tend to correct themselves, during which sellers who had held back during the slump now put their properties on the market and owner occupiers and first time buyers usually take the lead. Low interest rates may contribute to making investments look attractive. Novice investors enter the market and prices move up.
The Mania or ‘Boom’ Phase (economically known as Expansion) which is the 'feeding frenzy' part of the cycle. Greed and the 'fear of missing out' set in. Sellers can sense buyers' desperation and increase asking prices. Multiple buyers compete for properties and pay over the odds. Prices continue to rise and can experience double-digit growth, which should be a warning bell to investors. Demand suddenly matches supply (AKA The Equilibrium Phase) and as the market moves to oversupply, the boom ends, prices drop and we re-enter the Decline phase.
So what do investors need to know about the 18-year cycle? The truth is there's money to be made in both a Buyer's and a Seller's market. The key is to research your area of expertise, know the prices, know where the demand is coming from (what's its longevity) and know what represents a good deal i.e what's the exit strategy.
Throughout the last few decades, the best property investors have mixed opinions - Some say 'Buy well never sell' whereas others say 'I made a good investor because I always sold too early'. Ultimately it depends on you and your overall strategy to get to where you financially want to be. Flip lump sums, cash flow, equity... All are very appealing.
Some like to focus on flip lump sums to build up a cash chest in order to buy properties for cash and the re-finance once the value had been added in order to get all their cash back out + now be the owner of some forced appreciation. That's one strategy. What's yours?
Thanks for reading and we'd love to hear your thoughts as to your current strategy by adding a comment below.
Until the next time,
The Estateducation Team.