Thursday, 28 August 2014

The Property Market Cycle – Phase 3: Bubble

In this series, I will cover 4 phases of the Property Market Cycle. The 4 phases are:

  • Recovery
  • Growth
  • Bubble
  • Bust
There is no specific length of time the cycle can stay at each phase. Therefore it is meaningless to make a forecast of how much and when. Governments also frequently intervene in different phases of the cycle causing the phase to shorten of lengthen.

Each phase of the cycle has it’s own unique identification features. Recognizing the various phase of the cycle allows an investor to maximize their investment returns by taking the right action.

In this article, I will be covering the characteristics of the Bubble phase.

During this phase, the property price index make incredible jumps quarter on quarter. The general public sentiment is highly positive. Those buyers who stayed sidelines before now begin to enter the market after seeing their counterparts making paper gains on their property purchases. Suddenly, everyone is a property expert! Every corner that you turn, you get property advice from friends, relatives, colleagues…etc. Property agents may start to make cold calls to property owners to convince them to sell their unit to their pool of ready buyers.

Transaction prices and rental prices shoot through the roof. Property listings of units don’t stay for long and are snapped up shortly after listing.

Property developers begin to launch a flurry or developments to cash in on the trend. News of long queues for new launches are everywhere, new launches are 80%, 90% or even 100% sold out over just a weekend. There is a huge spike in new sales and resale volumes. The sub-sale market volumes begin to climb as early buyers start to flip the properties before they are even completed! Phenomenal stories of speculators making hundreds of thousands over a few months by reselling their units spread wildly. Buyers begin to even sell their options-to-purchase!

Some analysts begin to warn the public about an impending bubble in the housing market that may burst anytime. However, they are ignored or dismissed as doomsayers.

Stock markets have reached multi-year highs are continue to test new peaks. Any minor bad news rattles the stock markets but after a matter of days or weeks, the worries fade and equities rally some more.

Banks are so loose with their financing restrictions that practically anyone can get a loan.

Governments may implement tough cooling measures that bite hard. Markets take a temporary ease as people take a wait-and-see approach. Yet, quarter after quarter, prices are still on the raise. These tough cooling measures have seemingly no effect on cooling the markets!

This is a seller’s market. The sensible property investor now wonders why the public are happy to part with their money to purchase brand new launches with no cash flow for the next 3 to 5 years. But he understands, this is part of the cycle and waits patently.

The prudent property investor now thinks about reducing his gearing on his property portfolio. He keeps only his highest yielding investments that are easy to rent out and putting up the rest for sale. He tries to renew his rental contracts with as high an amount possible for as long as possible locking in the tenant; he knows that he would need the stable income coming to tide him through the next phase of the cycle.

He is careful to pick his buyers, negotiating long and hard for the best price he can get. He is not worried that he can’t get a buyer, because the demand is so high. The profit he obtained are used to either pay down his existing property loans or kept in cash waiting for his next investment opportunity.

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