Real estate is one of the world’s oldest and most popular investments. Unlike stocks or bonds, real estate doesn’t have to be bought or sold regularly. You can own a property for decades, and as long as you take care of it, it will continue to appreciate. However, there are risks involved in real estate investing. Like any other investment, the value of your property can go up or down depending on market conditions. But if you understand the real estate cycle, you can minimize your risk and maximize your profits.
In 2022, the real estate industry is projected to grow by almost four percent. The real estate cycle is the rise and fall of property prices in a given market. Moreover, it’s crucial to understand how the cycle works to make the most of your investment.
What is the Real Estate Cycle?
In order to understand the term, it’s vital first to understand what a business cycle is. A business cycle is simply the natural rise and fall of business activity over time. The cycles are caused by economic changes, which significantly impact the real estate market.
It comprises four distinct phases: recovery, expansion, hyper-supply, and recession. Different market conditions characterize each step, impacting the real estate market differently.
Four Phases of the Real Estate Cycle
Recovery: The economy is slowly improving in the recovery phase. This is typically the bottom of the market, and it’s a great time to buy property. Prices are low, and there is a lot of opportunity for growth.
Expansion: When the economy begins to grow after a period of decline, this is known as the expansion phase of the real estate market cycle. With a tight housing market, more job possibilities, and an increasing need for space, it’s the optimum time for homeowners to sell their houses for a high return on investment.
During the expansion stage, you should sell or invest in commercial purchases, apartment complexes, and investments.
Hyper Supply: The hyper-supply phase is when the economy is booming and housing is abundant. It can lead to a decrease in prices, as more houses are on the market than buyers. It is generally not a good time to buy property, as a return on your investment will not be satisfactory.
Hence, waiting until the market starts to rebound before selling your property during this phase is wise.
Recession: Property owners suffer through increased vacancy rates when demand is insufficient compared to real estate supply. Property owners have to lower rents to draw in tenants when the chances of rent growth are low. For property purchasers, the recession period is the right time to save up for the next cycle since it allows investors to acquire distressed properties at a reduced price.
How to Use the Real Estate Cycle to Your Advantage?
Now that you understand the real estate market cycle basics, you can use it to your advantage. Knowing which phase amongst the four you’re in can make smarter investment decisions.
For example, if you’re considering buying a property, you should wait until the recovery or expansion phase. This is when prices are low, and there is a lot of opportunity for growth. On the other hand, if you’re considering selling a property, you should wait until the hyper-supply phase. This is when prices are high, and there is a lot of demand.
The bottom line is that the real estate market is constantly changing. Understanding the real estate market cycle enables you to make informed decisions about when to buy or sell the property. This can help you maximize your earnings while lowering your risk. real estate cycle
