“When the tide is in, everyone looks good, when it goes out, you can see who’s not wearing shorts”.
In boom times, nearing everyone can be make money; however, in tougher times, it takes a greater level of skill to overcome the obstacles necessary to prosper.
When the real estate market is booming nearly everyone can do well to varying degrees. Equally in tougher times one may risk losing money in real estate or risk not achieving the returns that other investment classes may offer.
Property values as opposed to other investment markets have a major difference in these boom/bust times in that the prices do not fall past the previous cycles low levels. As the cycle of price fluctuations continue, each high and low level of the new cycle is always higher than the low level of the preceding cycle.
This consistent increase of price levels have caused some investment advisors to recommend putting clients money in property and waiting twenty years – as over time the peaks and troughs will even out and overall investors will experience price rises. This strategy is ok; however it has the following downside:
- This takes a long time.
- It does not take advantage of more active property investment strategies and opportunities that may be presented along the way.
Buy at the right time within the cycle and buy a” high potential property” – to reap the big rewards.
THE UPTURN
The upturn is characterised by rising rentals associated with excess demand for rental accommodation and by price and activity levels associated with investors seeking higher yielding investments.
- After stagnation of building activity an excess demand for housing emerges
- Excess demand for housing causes rents to rise, which provides property investors with an increase in investment yields.
- Higher yields attract investors into the market, thereby causing both prices and activity levels to rise.
THE BOOM
This phase is characterised by speculative investors seeking quick capital gains and volatility from a large inflow of investor’s funds into the market.
- The herd mentality is evident here as people invest on the promise/hope of large returns and hype starts to replace the fundamental reasons for investing.
- Developers flock into the market as their margins become attractive and building activity accelerates to a level that is greater than the underlying demand.
- Price and activity overtake realistic levels and property price rises are a greater rate than inflation.
- At the peak property prices are overvalued and yields are very low. The peak is also characterised by excess stock, high vacancy rates and pressure to reduce rents.
THE BUST
- Excessive building activity during the boom leads to oversupply.
- Rents yields reduce to low levels as a result of previous price rises and the outlook is for rents to further decrease until the excess stock is taken up.
- Investors seeking good yields withdraw from the market and those with the potential to invest choose not to. Prices become unsustainable, sales volumes fall and building activity fall dramatically until prices stabilise.
STAGNATION
- Following the bust, building activities stabilise setting the scene for the next upswing.
- During the stagnation period the excess stock that was built up during the boom is taken up. This period usually last until excess demand for housing stock is present again, causing developers to build and this flows into the next upswing.
- Prices tend to be undervalued during this period this is also coupled with a deficiency of dwelling supply which leads to pressure on rentals.
A common investment approach is to buy in boom and not wanting to buy in the bust. This strategy is potentially the worst approach to achieve good property investment returns. One should look at buying undervalued assets when the market is at the bottom, instead of paying top dollar when the market is in its peak or booming. Adopting a counter cyclical approach is recommended. “Buying well” is the key! Buying when the market is at the bottom of the cycle lowers your risk and enhances the potential for capital gains over the short to medium term.