4 Phases of Economic Cycle: How Long They Are?
It’s important to know the economic cycle to get a head start on your home search.
If you start looking for a home during the recovery phase, you’ll likely find housing prices lower than normal and have FAR MORE homes available that are in your budget than if home values are dropping.
The real estate cycle is a four-phase series that generally takes place over the course of a decade or so.
In its most basic form, the main phases can be broken down into RECOVERY, EXPANSION, HYPER SUPPLY, and RECESSION.
It may be tempting to wait until everyone else jumps in the market, but there’s no better time than today to get started on your presale condo search.
Why is the Economic cycle important?
The economic cycle is a repeating pattern that can provide reliable information about the possible returns of an investment property.
The economic cycle can also bring a lot of fluctuations in the market and it is important to understand how this fluctuation will affect your investment in the long term.
As an investor, you should determine if your property is in the recovery, expansion, hyper-supply, or recession phase of the economic cycle.
Doing so will allow you to make a more accurate assumption for the length of time the property must be held and the proper exit strategy to take.
Additionally, the economic cycle can predict the income and appreciation performance of an investment property.
This will allow you to better decide when to make capital improvements.
Why is the Economic cycle important?
There are two factors that can cause fluctuations in the real estate market: population growth and economic growth.
When population growth increases (because more people move into a certain area), there is more demand for housing units.
This drives up house prices as builders try to keep up with the new demand by increasing supply or by building higher-end homes so they can charge high prices while still turning a profit.
Economic growth also contributes to rising house prices by creating jobs and increasing income levels among potential home buyers — people who can afford better homes will be able to buy them when interest rates fall due to lower inflation rates.
Some economists also claim that high interest rates often act as a deterrent in the real estate cycles.
With interest hikes the monthly mortgage payment becomes expensive and fewer people can afford to own a home.
Why is the Economic cycle important?
You’ve probably seen headlines from the biggest news and media outlets like “We’re heading toward a recession” or “The economy can only go up from here.” While they may see a trend developing, economists cannot predict the future.
At best. They have an idea of where the economy may be heading, but as history has shown us, nobody knows for sure
Economic cycle are unpredictable, and some phases can last longer than others depending on local, national and global economic influence.
As a rule of thumb for investors, no one should be actually timing the real estate cycle, just buy and hold for the long term
4 Economic Cycle Explained
Phase #1: Recovery Phase
This phase begins with an economic decline, which leads to a decline in real estate prices.
During the recovery phase, the economy has characteristics of a recession, and some consider this as the early signs for the bottom of the trough.
Unemployment rates are typically high and consumption of goods low, and houses become more affordable for those looking to purchase a home during an economic recovery.
The recovery phase is a popular time for real estate investment and speculation since prices of properties are low (especially for distressed properties that need renovations), so the potential eventual return on investment from operation or resale is high.
Phase #2: Expansion Phase
In the expansion phase, the real estate market is completely recovered from the recession phase and is very strong.
It happens when the economy begins growing again, leading to a rise in demand for housing as people start earning more money and have more disposable income.
In a market where rents are high, real estate is expanding and booming, new construction is happening that’s when you can recognize the expansion phase.
A lot of investors at this time will buy new rental properties, renovate buildings since the demand is high and tenants are easily placeable
In this phase the economy reaches the point of expansion, the market is on the upswing and job growth is strong.
Phase #3: Hyper Supply Phase
This cycle means that there is a lot of supply and not enough demand for housing in many areas.
This causes home prices to fall significantly, especially in some high-end markets. A hyper supply phase can lead to an increase of foreclosures as landlords begin to sell their properties at discounted prices, often below market value.
The oversupply of real estate is usually caused by overbuilding or a shift in the economy pulling back demand.
That’s good news for buyers who have been waiting for prices to go down so they can afford a home purchase — but bad news for sellers who might be stuck with an overpriced property that’s taking longer than usual to sell.
Rents will continue to fall as many tenants look for more affordable options outside of the oversupplied market
Phase #4: Recession Phase
In the recession phase, supply has over-exceeded demand, and demand plummets—causing high vacancy rates and negative rent growth (or rent growth below the rate of inflation). As a result of recession, people loose their jobs or have stagnant wages. As a result of all this, supply outstrips demand and vacancy rates rise—meaning there are more vacant homes on the market than there are buyers for them. This leads to negative rent growth (or rent growth below the rate of inflation).
This is what happened in 2008 with housing prices in the United States: after years of rapid growth, home sales began to slow down; then foreclosures skyrocketed; then prices plummeted as people stopped buying houses because they didn’t feel secure enough in their jobs or income to commit to purchasing property.
Final Thoughts
Cycles of economy are unavoidable and predictable in some ways.
While we can’t be exactly sure when a market is going to change and how much it will the shift by, we can get a estimate by looking at historical data. In many cases, past data is the best indicator for future trends.
In this scenario, a realtor plays a very important role in the success of your real estate investment.
A good realtor will be willing to spend the extra time with you sharing their real estate cycle knowledge and will show you all the options available to you.
It is important that you choose the best realtor that can help you invest in properties and get the support needed.
If you want to learn more about buying or selling property at the right time, get in touch with Ravi Bhindi who has 18+ years of experience in real estate and has experienced real estate cycles multiple times.
