Cyclical Nature of the Real Estate Sector

The real estate cycle is a 4-phase wave pattern through which commercial real estate and housing markets move. The 4 phases of the real estate cycle are:?

-Recovery;

-Expansion;

-Hyper Supply;

-Recession

1.?Recovery:?

In the recovery phase, the real estate market begins at a low point from the recession phase—occupancy & rental rates are low, & new construction slows—& gradually rises in strength. If there is any rental growth, it occurs below the rate of?inflation. For individual homeowners or renters, the recovery phase can be challenging to differentiate from the recession phase because the market will look much the same; experts look at trends like gradual occupancy increases or growing demand to identify when the recovery stage has begun. The recovery phase is a popular time for real estate investment and speculation since prices of properties are low (especially for distressed properties that need renovations), so the potential eventual?return on investment?from operation or resale is high.?

Great time to pounce on?below-market value?properties; you can wait out the rest of the recovery period by adding value to these properties so that they are ready to sell or rent outright as the economy shifts into the expansion phase. Timing is the key.

2.?Expansion:

In the expansion phase, the real estate market is completely recovered from the recession phase and is very strong. When the real estate market expands, vacancy is low, rent rates are high (and rising), property values are high, and new construction is typical to see. The expansion phase is a standard time for real estate investors to buy new rental properties or renovate old buildings since the demand is high and new tenants are usually easy to find. While the market is on an upswing, it’s advantageous to invest your efforts into developing or redeveloping properties that cater to the current market’s tastes and sell for more than market value.

3.?Hyper supply:

In the hyper supply phase (or oversupply phase), the supply will finally catch up and exceed high demand as previously started construction projects continue to wrap up. Vacancies will rise, and rent growth will slow. During this phase, some real estate investors will buy properties from companies that are nervous about the impending recession and eager to sell at a more attractive price. These investors will then wait until the expansion phase to sell (often called the buy and hold approach). Another common investment strategy is to invest in a tenant building that’s at capacity and has long-term leases in place since it will continue to bring in a steady cash flow during the coming recession.

4.?Recession:

In the recession phase, supply has over-exceeded demand, and demand plummets—causing high vacancy rates and negative rent growth (or rent growth below the rate of inflation). Some opportunistic investors will look for accessible investment opportunities during this phase since properties will be at rock-bottom pricing (especially foreclosures). They then wait until the real estate cycle circles back, and the downturn is over—as the market begins to recover and eventually expand.

Factors Affecting the Real Estate Market Cycles:

1.)State of the economy:

One factor that drives demand for real estate is the income of the general public.?When the economy is booming, home prices will rise in accordance with rising wages. People can afford to spend more money on housing, and this boosts the demand for properties. Conversely, in a recession, falling wages mean that people will have less purchasing power. As a result, demand for housing weakens, causing real estate prices to tumble.

2.)Demographics:?

The makeup of the population, and major shifts in this population makeup, can drive a market significantly. For example, the baby boomer generation’s retirement is expected to cause major shifts in the housing market, as many choose to downsize or move to vacation areas.

3.)Interest rate:

Interest rates play a major role in determining the demand for real estate. High-interest rates discourage buyers from buying as the higher financing cost reduces the returns from real estate investment & even serve as a deterrent for many would-be buyers from buying. A low-interest rate environment, on the other hand, will attract more buyers and cause an uplift in investment activities in the housing market.

4.)Unemployment:?

Unemployment will affect people’s ability to purchase real estate, as it decreases their ability to apply for mortgages and afford mortgage payments.

5.)Government policies:?

The government will occasionally intervene with policies to help boost a market that is particularly sluggish or in a prolonged recession. Policymakers have the ability to implement tax deductions, subsidies, tax credits, and different homebuyer programs to incentivize consumers to purchase real estate. These types of governance mechanisms can greatly influence the US housing market cycle.

6.)Consumer confidence:?

Consumer confidence is simply the outlook consumers have of the economy, both in real-time and for the future. Investment deals and spending will be higher when consumer confidence is high, and lower when consumer confidence is low.

How long does the RE market cycle last?

The average real estate cycle in the US runs for around 18 years. However, real estate cycles vary in length and are unpredictable. Their overall duration relates to some or all of the factors mentioned above, and some cycles can last much longer than others.

The current cycle began not long after the GFC in 2008 and can be termed as a "bull market" where rentals and prices continue to increase. Some experts are once again predicting a slowdown and the recent?interest rate yield inversion?in the bond market, amongst other things, is said to be a signal for the gradual end of this current real estate cycle. However, as yet, there is no major evidence to support a slowdown.

Where do we currently stand in this 18-year market cycle?

After an astounding residential real estate market in India in 2022, setting new sales records of 68% YoY, further demonstrating the industry's prominence as one of India's fastest-growing industries, the real estate market may be reaching the end of an upswing and getting to a peak, so if valuations of your property have increased well over the past few years, it may be a good time to think about selling. If you’re a new investor, you may still find good deals available for reasonably priced real estate, but you’ll have to look long and hard. In either situation, however, it’s always good to remember to proceed with caution.