Monday, 1 September 2014

The Property Market Cycle – Phase 4: Bust

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 Bust phase.

During this phase, the property price index declines quarter on quarter, perhaps accelerating downwards. The general public is caught unaware by some “black swan” event and the sentiment suddenly turns very bearish. Some may attempt to sell their properties lower than market value in order to cash out. Others caught unaware start to panic and sell at depressed prices. Still more are those who are unable to finance the monthly mortgage will have their properties seized by the banks and auctioned off.

All these create surge in supply of units causing prices to spiral downwards. Transaction prices and rental prices dip lower. Property listings garner little interest from the markets and take a long time to transact.

Property developers inventories start to climb. Desperate to clear inventory, they re-launch projects that did not sell well at much lower prices. Many sales gimmicks such as free renovation, cars, discounts and furniture vouchers are dished out in an attempt to close sales. There is a huge drop in new sales and resale volumes and virtually no sub-sales transactions at all.

Stock markets have likely crashed and bottoming out at this point. No one recommends equities or even properties and investment. Investors have been burnt by both losses in the equity and property market.

Banks tighten their financing restrictions and loans are difficult to obtain. Financial institutions may go one step further and demand customers top up differences in the property value and the loans. Those unable to do so will have their property seized.

Governments worried about the collapse in the property market begin to withdraw their cooling measures one by one. However, the public is not interested in property and prices continue to slide.

The wise property investor knows that the cycle has ended and a new one will begin shortly. He monitors the property trends to ensure that he enters only after the bust has fully run its course and bottomed out.

He feels secure knowing that his property portfolio is still generating him passive income and cash flow. He is sitting on a large profit from his previous investments and waiting to expand his portfolio at bargain prices. 

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