Factors Influencing Real Estate Market Cycles
The real estate market is cyclical. Like any other financial industry, the real estate market exhibits cyclical patterns that can have a substantial impact on investment prospects and property values. That is because this industry is connected with the overall economy and a dynamic sector with ever-changing trends. Global occurrences such as the COVID-19 epidemic, Brexit, rising global inflation and interest rates, the Ukraine-Russai war, and the United States-China trade war are just a few of the recent key issues affecting the real estate industry. Even if the national economy is strong, real estate sales in particular areas may stagnate. Thus, understanding market cycles is critical for investors who want to make informed decisions and maximise their returns. Investors must be extremely astute in order to remain ahead of market trends and actively monitor external factors that affect the general health of the economy.
What is Real Estate Market Cycle?
The repeated patterns of ups and downs in property prices and demand across time are referred to as real estate market cycles. These cycles are impacted by a variety of economic, social, and political factors, and they can have a considerable impact on regional and global real estate markets. Understanding these cycles is critical for investors to make sound decisions. A variety of real estate specialists can utilise this cycle to forecast the best moment to buy, hold, or sell.
What are the Four Stages?
Expansion Phase
The real estate market expands quickly throughout this phase, with growing property values, rising demand, and a thriving economy. The expansion phase is influenced by favourable economic circumstances, low-interest rates, and optimistic investor attitude. As demand outpaces supply, there are frequently new developments and construction projects.
Oversupply or hyper-supply
It occurs after the expansionary phase. During the expansion phase, investors and developers go into a frenzy to ensure that supply keeps up with rising demand. Property owners often liquidate their inventory out of fear that their properties will go vacant or unsold. Inevitably, there will come a moment when supply begins to exceed demand, either due to an excess of inventory on the market or to a sudden shift in the economy that causes demand to fall. Signs of an impending slowdown start to emerge as demand begins to decline.
Recession Phase
The market begins to cool during this stage. Property values level out or fall, demand declines, and the rate of new development slow. Economic growth may slow, prompting cautious investor behavior leading to minimal investments.
Recovery Phase
The recovery phase begins when the real estate market is at its worst and lasts until it improves. The recovery phase is the most gradual of the four cycles and often takes the longest. During this phase, investor confidence is low, and there is a surplus of unsold properties in the market. However, these challenging times often present great investment opportunities for those willing to take calculated risks.
What are the Factors Influencing Real Estate Market Cycles?
Economic Indicators: Economic factors such as GDP growth, unemployment rates, and inflation all have a substantial impact on market cycles. Demand for real estate rises during periods of economic expansion, whereas recessions can cause the market to decline. For example, between 2008 and 2010, inflation rates reached 25%, driving up real estate costs and making it difficult for consumers to purchase homes. On the other hand, real estate prices were largely steady during periods of low inflation, between 2014 and 2016 (werisegoc, 2023).
Interest Rates
Changes in interest rates impact mortgage affordability and, consequently, the demand for property. Lower interest rates tend to stimulate buying activity, while higher rates can deter potential buyers. The interest rate in Pakistan increased to 22 % in June 2023 (REUTERS, 2023), leading to low purchasing power.
Supply and Demand
The balance of supply and demand has a direct impact on property values. Prices rise when demand exceeds supply, and vice versa. For instance, the real estate market in Pakistan is expected to grow by 2.3% in 2023, due to the growing need for affordable housing and the interest of investors from other countries in the market (Yasin, 2023).
Demographics
Population expansion, migration trends, and age demographics all have an impact on housing demand in certain locations, resulting in localised market cycles. According to the International Growth Center’s 2019 Report, the urban population of Pakistan is predicted to expand by 2.3 million each year over the next 20 years. This equates to a demand for 360,000 households at 6.3 people per household (Mufti & Raza, 2022).
Government Interventions
Government interventions, such as tax breaks, housing subsidies, and regulatory changes, can have an impact on the real estate market in both the short and long term. Pakistan’s government budget for the fiscal year 2022-23 increased the tax on property sales and acquisition by 9% overall (Pakistan Today, 2022). However, there is a widespread belief that revenue will be drastically reduced because property sales and purchases have already switched into reverse gear. In addition, the property dealer organisation staged nationwide strikes in protest of the tax increase.
Investor Sentiment
Market sentiment and speculation can cause real estate booms and busts, resulting in exaggerated changes in property prices. The Pakistani rupee has been falling against the US dollar, making it more expensive for Pakistanis to buy real estate. Foreign investors, on the other hand, see the depreciation of the currency as a chance to engage in the country’s real estate industry at a lesser cost. As a result, international investors are likely to capitalise on the current economic environment and invest in Pakistan’s real estate industry (Khuld Builders and Developers, 2023).
How to Navigate Real Estate Market Cycles?
Research and Analysis
Comprehensive research and data analysis are essential for comprehending market cycles and spotting new trends. To make informed decisions, investors should use past data, economic indicators, and demographic trends.
Diversification
Having a diverse real estate portfolio may help lessen risk during market downturns. Consider investing in a variety of properties and places to diversify exposure.
Long-Term Vision
Successful real estate investors frequently take a long-term perspective. They can weather market cycles and capitalise on opportunities that come during downturns by focusing on steady, sustained growth.
Buy low, sell High
This basic investment principle also applies to real estate. To maximise gains, investors should buy during market troughs when prices are low and sell during market peaks to ensure maximum returns.
Focus on Cashflow
Prioritise positive cash flow while investing in rental properties. Consistent rental revenue can help mitigate market downturns while acting as a cushion during difficult economic times.
Market Indicators to Watch
Keep a watch on major market indicators and trends. This enables investors to detect market shifts early on and adjust their tactics accordingly.
Be Patient
Market cycles take time to unfold, and impulsive decisions can lead to poor outcomes. Patience and discipline are crucial attributes for successful real estate investors.
Conclusion
Understanding real estate market cycles is essential for investors attempting to navigate the volatile nature of the property industry. Investors can capitalise on possibilities given by each stage of the real estate market cycle by taking a strategic approach and remaining vigilant.
References
Khuld Builders and Developers. (2023, March 30). Why Invest in Real Estate in Pakistan in 2023. Retrieved from LinkedIn: https://www.linkedin.com/pulse/why-invest-real-estate-pakistan-2023-khuld-developers/
Mufti, A., & Raza, M. (2022, November 6). THE DISTANT DREAM OF AFFORDABLE HOUSING. Retrieved from DAWN: https://www.dawn.com/news/1719280
Pakistan Today. (2022, December 4). Impact of real estate. Retrieved from https://www.pakistantoday.com.pk/2022/12/04/impact-of-real-estate/
REUTERS. (2023, June 26). Pakistan central bank raises main interest rate by 100 basis points to 22%. Retrieved from https://www.reuters.com/markets/rates-bonds/pakistan-cenbank-raises-key-policy-rate-22-statement-2023-06-26/
werisegoc. (2023). Impacts of Inflation on the Real Estate Industry of Pakistan 2023. Retrieved from https://werisegoc.com/impacts-of-inflation-on-the-real-estate-industry-of-pakistan-2023/
Yasin, M. (2023, April 17). Understanding the Real Estate Market in Pakistan: 2023 Trends and Forecasts. Retrieved from LinkedIn: https://www.linkedin.com/pulse/understanding-real-estate-market-pakistan-2023-trends-yasin-/
This article is written by Haneen Gul. Haneen is a research analyst at the Iqbal Institute of Policy Studies (IIPS).
Leave a Reply