How Property Cycle can Accelerate Your Financial Growth?

Property Cycle impacts on the creation and destruction of real estate wealth. So if you want to grow rich with real estate investing you have to understand what are the key drivers and market influencers that affect the property cycle.

The question that you as a property investor will want to get answered: 'Is it the right time for me to buy an investment property?' Savvy real estate investors will advice you that it is always a good time to buy property because different strategies can be used to generate wealth during different phases of the cycle. However if you buy property at the optimum time when the prices are at their lowest will help you to accelerate your wealth building process.

Although property cycle is predictable it is not an exact science. This is because there are numerous key drivers that influence demand and supply and often these key drivers do not operate in unison. Whilst some key drivers will push the property prices up the others will try to reduce the prices. Each key driver in turn has numerous influencing factors. To complicate matters further is the powerful human emotions of greed and fear that drives the market that makes predictions very difficult.

However research has shown that these key drivers follow a regular pattern and peak at specific phases of the property cycle. So by carefully studying the key indicators you can come to know which phase of the property cycle you are in and what you should to maximize your profits.

There are basically four phases of a property cycle. Each phase can also be related to property clock for ease of understanding:

• Boom Phase - Is the when the market is at the peak or at the noon position which relates to 12 o'clock on the property clock.

• Slump Phase - This follows the property boom phase when the prices are on the decline. It relates from 2 to 5 PM on the property clock.

• Recession or the Bust Phase - This is when the property prices are at their lowest and relates to the 6 PM on the property clock

• Recovery Phase - During this phase the prices start moving upward and relates to 7 to 10 AM on the property clock.

Key Drivers

Key drivers are the factors that influence supply and demand. Some key drivers are very strong and rapidly drive the property through a particular phase in the cycle where as other drivers are more stable and take much longer to affect the cycle.

It is important to understand that key drivers sometime pull in different directions but move the market collectively rather than individually.

Demographic - This driver determines the demand for the property and includes net migration, population growth, number of people per household, scale of property construction and vacancy factor.

Financial - It decides the financial viability of a property whether it is owner occupier or an investment vehicle. The key financial drivers are income level, availability of finance, return on investment, rental affordability, property values and purchasing affordability.

Emotional - Emotions of fear and greed are very easy to identify yet so many feel safe in the herd mentality. Media thrives by playing up the sentiment of fear and greed. There is a saying 'When the emotion goes up, intelligence goes down'. The key indicators are average days to sell a property, number of listings for sale and sales levels

Market Influencers

Unlike key drivers market influencers do not impact the property cycle directly. Media and most investors believe that interest rates, inflation, legislative amendments and off shore investments drive property market. But research and historical data indicate that these factors do not influence the property cycle directly but influence some of the key drivers.

These market influencers affect our perceptions and are played out in the media. We must also be aware that that at times perceptions can become reality. For instance if the interest rates remain high for a length of time it can reduce property affordability that is a key driver.

Recovery Phase

The first indication of commencement of recovery phase is when population and rents start to rise. Media will start reporting that there is shortage property to rent. Finance becomes easier. Fear will still grip majority of the population but for a wise investor it is time to buy aggressively.

Boom Phase

This is the most exciting phase for the inexperienced investors. It is a period when greed takes over and fear takes a back seat.

It is also a time when experienced investors book their profits.

The clues to a boom period are when media starts reporting of success stories with investment properties and advise that property is a very good investment.

End of the boom phase is indicated when vacancies start to increase, construction levels have reached their peak, there is shortage of labor, the property are still continuing to rise and finance is still easily available. Many novice investors will believe that boom will continue. They are misguided by many experts and property gurus who spring out of no where during this phase. They will advise that this time things are different and the boom will continue. Their only aim is to lighten your pockets. Greed is the driving force during this phase where basic investing fundamentals are forgotten as property prices spiral upwards.

There is a saying that 'When emotion goes up, intelligence goes down'. This is exactly what happens at the end of a boom cycle.

As the end of the boom nears a wise investor will start increasing his equity to loan ratio by selling some of the low performing properties. They will start preparing for a holding pattern by making improvements to increase rent ability of the properties they wish to keep as long term investment.

Slump Phase

The key indication to start of the slump phase is when there is over supply of property and vacancy rates start to rise. Media will start reporting that the market is over due for correction but it will be a soft landing.

As the vacancies increase and prices start to fall fear starts to grip the market. Interest rates start to rise and finance becomes relatively difficult to get. Media will start to report that it is cheaper to rent than buy property.

During this phase wise investors buy properties that are well below market from motivated vendors. They look to buy at foreclosure auctions or short sales.

Click here to read about the 'Real Estate Wealth Triangle' that explains how you can make during various phases of the property cycle.

Always remember…..

Property Investment is a Marathon and not a Sprint !

There are people who try and become investors only at the end of the Boom Phase. They jump into the fray when the party is ending. They are driven by greed and have no education. These people cut their fingers and quit even before they start.

To create wealth with property investment you have to be patient and GROW RICH by using varied strategies during different phases of the property cycle.

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