The property cycle 1
The real estate market exactly as the stock market and other markets develop in cycles. The difference to the stock market is that in the case of the real estate market the people are not used to look the whole day at charts. Because of that some of them don't realize that there are strong defined stages of development of the cycle. You don't need to make technical analysis in order to identify the cycle phase and when the market will make a turn around.
However, this doesn't mean that the properties don't obey to the same market rules and don't follow a cyclical way of development.
In general, the phases of the cycle are as follows:
You may take advantage of my online course "When is The Best Time to Invest in Property?"
There is a very detailed description of the whole process and the market forces that drive the property cycle from one phase to the other. There are also a bunch of strategies you may apply to take the maximum advantage of the cycle.
You may find a definition of the property cycle with 4 stages and not 3 as I have given it to you above. Some authors split the recovery phase in two parts: recovery and expansion. For me this is not a crucial difference, because the idea is the same. As long the prices climb steadily and consistently the market is in a recovery phase. When the prices start to jump to all-time highs with higher and higher acceleration then we could describe this as a boom.
From this point of view the boom is the easiest to identify cycle phase. On the media everybody speaks about real estate. Everybody commends on the high prices of the properties, provides statistic data with high growth percentages. More and more the defended logic that this growth will never have an end become the common theory and increasing number of people start to believe in it. Curious comparisons are made with the aim to prove that in this case everything is different and the prices will catch up with the prices in other parts of the world etc. When you hear the journalist to compare the prices in your city with the property prices in New York or London and to argue that this difference is too large and will be closed sooner or later, then you know your market is in a boom phase.
On the stock market the investors have a proverb that says: "No tree grows infinitely in the sky". It's the same with the real estate market.
I remember one reportage on the Bulgarian television in the summer of 2008, in which one reporter commended the prices in Sofia stating that after the entry of Bulgaria in the EU the prices must catch up with the prices in the other EU capitals cities. From this perspective she continued the jump in the prices with more than 20% for a single year is more than normal. She said also that the difference between the prices in Sofia and London are more than EUR 10.000 per sq.m. and this gap ought to be reduced. When I heard this comparison, I thought that the market has got crazy. To compare a city with 1,5 mio inhabitants with one of the financial centers of the world is a bit exaggerated. These are illusions and you must recognize them when you hear them. All these clues can warn you that the market is in a more dangerous condition. There is nothing to fear of course. You must simply be aware of it and prepare.
Because the real estate investment could be often long-term investment you need to prepare for the coming depression of the market. The very least that you could do is to avoid buying new properties for top dollar exactly in the boom phase of the market. Especially if you are keen to buy your properties with nothing down. Be patient.
This is very easy to tell and difficult to execute. The reason is that exactly in the boom everybody is optimistic and positive. The banks are willing to give you money and literally chase you to take a loan with favorable conditions from them. Among other things they will certainly offer you a loan with loan to value ratio of 90%. To resist to this temptation is simply hard to do.
The boom is also a sellers' market. You will easily recognize that it is increasingly difficult to negotiate with the seller for any concessions from their site. The sellers have many willing buyers to choose from and he/she is not willing to accept any restrictions in the contract with you. Even if they do, there are insignificant. There are almost no negotiations. "Take it or leave it" is the mantra of the day. It's a sellers' market.