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Property Market Cycle - Out of sync is good.



Tim Levchenko-Scott June 2008




The property market cycle - The property investment cycle. The property development cycle. The interest rate cycle and so on. They all exist and sometimes seem to operate like a well-oiled machine which moves predictably from one phase to another. Or that's what many a property spruiker or investment advisor would like us to believe.

The reality is different. These cycles definitely exist but they're much more difficult to pick accurately than you might think. Take property for example- it goes through boom/bust/slump/recovery. Its not too difficult to spot in hindsight. What I don't agree with though, are the bold statements that the property cycle lasts a given number of years. You know its rubbish when you hear so many different numbers. I've heard everything from 5 to 10 years, and every one of the folk who told me the magic number was convinced that the market followed the cycle faithfully. If it was that easy to predict they'd already be multi-millionaires and not talking to me. No, there are too many other variables and the market is an aggregate of millions of decisions, which are in turn based on any number of variables.

A few years ago my main bank manager was telling me with some certainty that interest rates would be coming down again by mid 2007 at the latest. Well, he was wrong, wasn't he? Now, this guy was no fool, and he was basing his comments on what the economists at Westpac were telling everyone, but in the end, for a whole bunch of reasons that we won't go into here, interest rates kept on going up and they haven't started coming down yet.

Net migration is another classic. Sure it goes up and down in a cycle, but picking it and predicting it is nigh-on impossible. The government's predictions are sometimes way out.

Then, on top of all the well known cycles, such as the property market cycle, throw in a few unpredictable world events - oil shock, war, terrorism, credit crunch, etc, etc and then look at how quickly things are changing in places like China and India, and how the heck is anyone supposed to predict what's going to happen.

Anyway, the point here is that this is a good thing if you're an entrepreneur. The more unpredictable things are, the more opportunites there will be. Look out for some serious bargains in property and distressed businesses towards the end of 2008 and into 2009 (of course this prediction may turn out to be completely wrong, but we already know that). Seriously, its going to be a very dynamic few years. Being ready for what happens, being flexible and nimble will be more important than sticking to some rigid plan based on a whole bunch of assumptions which may turn out to be complete rubbish.

The property market cycle always presents counter-cycle opportunities. Too many folk try to jump on the elevator when it looks like things are going up, then they want to ditch property altogether when it goes into a negative phase. One of the best counter-cycle opportunties should occur during the next upswing. One of the things that's changed since the last slump is that the amount and complexity of regulations that developers must comply with has grown exponentially. This has created an even longer than usual time lag between someone making the business decision to build a given property and the property actually materialising. This is evidenced by the fact that as the market has flattened and now turned, building consents have held up surprisingly well. Part of the reason is that a lot of these consents would have been applied for ages ago - before the market had turned.

What this means for the next property market cycle is that there will likely be a phase when the development cycle is in a real slump and all of a sudden people will notice that rents are going up and properties are shifting more quickly. As is usual, potential developers will start making plans again. The difference this time will be that, with all these regulations in place it will take longer than previously for these plans to become reality. So, in the property market there will be increasing pent up demand for housing but an under-supply of the product. No prizes for guessing what this will do to values. That's right -upward pressure, and we'll be off on the next boom phase of the property market cycle. It could even be a bigger and quicker boom than the last one if immigration takes off like I belelive it will before too long. As and when this happens, fortune will favour the brave. All the worry wart advisors will be tut tutting and cautioning against getting into property because its been performing poorly for a couple of years and they won't believe that it could take off again. But if those signs are there - immigration, rent rises, low building consents - get in quick, the property market cycle will be turning. Don't wait for low interest rates, or for all the back seat driver commentators to tell you it's a good idea -it'll be too late then. It's impossible to predict when the cycles will turn. It's more imortant to understand the signs of each phase and be ready to act quickly.

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