How To Interpret The Property Cycle And Benefit With Focused Investment Timing
The world economy goes up and it goes down as it answers to many factors influencing it. It will always be influenced by factors like high and low interest rates, optimism and pessimism, inflation and deflation, political stability and instability etc. A countryís economy, similarly, goes up and down according to many factors that will influence itís particular ways. With many similarities between the worldís economic cycle and a countryís own economic cycle, particular political, financial and even unforeseen factors like a new oil find, a platinum find, or a world sport event could get a different rhythm going.
Nothing is cast in stone, but to keep track of the existing phase of the cycle and the one that is to follow, is of utmost importance to all investors. Every investor needs to have a rational approach and has to check the cycle on a regular basis. This should form the pragmatic structure for decisions as it is almost impossible to interpret the bombardment of daily new data in a manageable way. It should be kept in mind that there will be fluctuations during a trend in the cycle and also that the next top or bottom of a cycle could be higher, lower, flatter, sharper, shallower. There is a basic structure to the cycle, but it is complex and it is post modern, it will vary and it will surprise you.
In time, as one masters the basic ways that the economic cycle presents itself, the capacity is also mastered to immediately sense that new data coming out will be an important contributing factor towards confirming a trend or proclaiming a trend in process of changing and turning around.
The property cycle normally lags behind the general economic cycle. The previous property boom is an exception to the rule. Extremely low interest rates forced prices to exuberant heights and the resulting buyers frenzy created a severe imbalance. Re-adjustment is now the leading game.
A normal cyclic process would look like this: When the world economy starts to turn up with the lowering of interest rates and spending starts to take shape again, property will not be affected immediately. The stock markets seem to have an inbuilt sensor to anticipate an upturn in new growth up to nine months in the future or even more. The moment John Ross tells his wife that he is having his second good month in car sales and that he will buy her a new fridge if this new trend continues into the third month, Peter Holliday, the local stock broker will have a "subliminal sound" reaching his attentive ears and he will become increasingly restless in front of his sleeping trading screen. When Mary Downham walks into the Toyota dealership to buy on strength of her husbandís 13 new Bosch fridge sales, stock broker Peter Holliday will have checked the reality of the new symphony in his cheering ears with feedback from colleagues in the financial field, and things will start to happen.
Property sales, though, will be rather quiet for quite some time before it responds to a new momentum in economic activities. It is when the effect of lower interest rates start to work through to monthly bank statements that Ann Sarstadt will turn from her balancing books to her husband in front of the TV and pronounce her intention to buy him a new house. If Ann holds a fine balance between her analytic and practical capacities, she will respond at an early stage to the wakening of the new upward trend in the property cycle and they will buy their new house before the trend becomes a storm and the buying expensive.
Watch children playing on the see-saw. They will merrily participate and help the process on in going up and going down. At some point though, the peculiarities of the human spirit will start to show. One of the children will suddenly withhold his or her awaited action to jump start the next process and will just sit there passively on the ground level watching the frustrated other party up there in the air swinging legs to no effect. A deliberate game will start to enfold.
The one defending the seat on the ground will sit as if in it for all eternity. The one at the top will do his/her utmost best to become heavier with immediate effect and will endeavour to push this visualized new weight into the space below the seat there high up in the air. It is just as amusing to watch a parent trying to respond in one gesture to both the child at the bottom smiling and to the one at the top busy blowing its top. As always something will give. A point of no return will be reached. One competitor will still fight to keep the position in charge but the other, wriggling, will sense that the movement below his/her bottom is going to do the trick this time round. One will go up and one will go down. As Zorba would have said "..and that is the whole damn catastrophe"!
Supply and demand. One is in charge and then again it will be the otherís turn. It is all about timing. When the interest rates are high and the economy in a lull, nobody is actively interested in buying property, but you will find lots of sellers. At some point this will change when, as the great Roger Waters sings... "the tide is turning". And then the strong supply of properties will dwindle and a wave of buyers in a fury will arrive with cheque books and bonds in place to drive property prices up. The advantage point to strive for would be to become a buyer of property when the economy is scraping the bottom and interest rates are still high, but the turning point for ongoing rate cuts becomes clearly visible.
Just the same is applicable on the other side of the coin. When the economy is feverishly burning at formidable heights, with people still climbing into property buying and not seeing that talk becomes laden with expected interest rate hikes, the time would be right to seriously consider selling. It will always take guts to go against the current "mood" of the market and to focus rather on the building up of the next trend.
A cryptic view on the situation now: Property prices will not necessarily show negative growth but will most likely show mediocre performance in the short term. America, though, is in danger of a very weak phase in itís property cycle. Things can also become very choppy if the economy in China overheats and a general inflatedness takes hold.
It thus make sense to watch events carefully and to put that eager big toe in the water when the tide is sure in itís turning. Watch out for what the stock markets will do later this year and watch out for interest rate shifts during the next twelve months!
Wim van der Walt
July 17, 2007