The often-referenced Property Clock is a visual representation of a market’s property cycle. When one refers to the Property Clock, they talk about where a market is in its current cycle.
A feature of property cycles is their close association with the finance cycle where credit slowly becomes more available, leading to a credit boom period, followed by the tightening of credit availability and rising finance costs, and a credit crunch, when finance for development ceases to be available.
What are the phases of property cycles & points on the clock?
12 O’clock - Heated Market (Prosperity/Peak/ Boom) Prices Peak
New investment in properties has a multiplier effect through demand for building materials and the new employment created, thus pushing the economy to new levels and property market experiences higher prices, ample supply of land or housing. As market confidence grows and demand increases further, prices of houses peak, rents are pushed up and vacancies reduced. The cycle peaks and then enters a decline, which is accelerated as more building projects are completed, flooding the market….so go into the downswing.
3 O’clock - Downswing (Recession)
As demand is satisfied, particularly for investment goods, the market peaks and flattens with falling constructions. With prosperity, rents initially increase, but as early projects are completed, initial demand is satisfied, and we move into an excess supply of premises, causing rents to fall. The values of new developments – houses and apartments – prices begin to fall, and it becomes a buyers’ market.
6 O’clock - Depression (Bottom) Prices Bottom
As profitability falls, demand decreases, and the over-supplied market stagnates. Developers must sit and wait for better times, halt work in progress, suffer considerable losses through spending on the completion of projects that remain vacant, or are forced to sell them at knock-down prices. Rising interest rates and falling rental income puts pressure on the ability of developers to repay loans. Many developers are highly geared and lack the financial reserves to finance incomplete or vacant developments through a recession, and a number may go bankrupt.
The cycle goes on. The cycle turns again as some investors can take advantage of depressed prices to buy undervalued assets. Investors and financiers anticipate a recovery in the property market by responding to signs of rising demand.
9 O’clock - Upswing (Recovery)
Finally, the reduced prices of housing, apartments, land etc. are associated with low-interest rates. This tends to attract borrowing for housing and starts the property market to move upwards again. From a demand point of view, house prices are low enough to attract people to buy a house again. Undersupply of housing becomes a seller’s market, and prices begin to rise again, bringing new construction into the market again. Beside low house prices, low-interest rates will also benefit demand for housing. Mortgage rates are generally low as construction picks up.
Although the Property Clock depicts a circular motion where there are the same peak and lows each time around, the property cycle trends show these high and low points, while continually trending up over time. Knowing this, would you sit around and speculate about a crash and try and time the market? Or would you take action based on sound and proven investment fundamentals?
So where do you think we are on the clock today?
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