Property Market Cycles – Phase 1 Early Buyers

By on December 23, 2012

History have taught us that bread is best served toasted… and that markets move in cycles.

There are 4 main phases of a cyclical property market.

Cyclic patterns are caused by the tendency for free markets to self-correct. And due to the time lag factor in real estate demand and supply, there always tend to be a period of excess demand and excess supply.

A time gap exist before the need for more real estate is identified and when it actually becomes available to serve it’s purpose.

If properties are intangible and can be added and deleted instantly at anytime like a folder on your desktop, the property market will be in equilibrium at all times.

Each phase in the cycle has its own unique characteristics.

In Phase 1 Early Buyers, the market is experiencing an oversupply of properties. This can include those for residential use and those for commercial use.

Property supply is one of the major forces that can single handedly take a market up or down.

A question new investors often ask is how can it be possible to have an oversupply of properties. After all, housing planning caters to a population that can be quantified.

Why would a planner worth his salt plan 500,000 new homes when the demand is just 50,000.

Here are 2 big reasons that may quench your knowledge thirst.

Reason #1

Private developers can be expected to build up as many apartments as they can on land that they have purchased.

They are after all profit driven and have spent hundreds of millions of dollars on the land.

A conservative parcel of land can actually house thousands of people or more when they are stacked on top of one another condo style.

The higher an apartment is, the higher the price that it can fetch as well.

Reason #2

In a city like Singapore for example where land is scarce, the government cannot afford to waste land by building 4 storey residential building just because all buyers add up to 4 storeys.

They have to provide proper diversity in locations with optimal use of land.

If there are 50,000 ready buyers in Singapore all over the island, the government cannot cramp all 50,000 in a small pocket of land in Kranji and expect all these buyers to move there.

So they have to build public housing flats in many locations to serve the people in different areas.

Once a piece of land is identified, it has to be built to optimize land space with the capacity to house as many households as possible without creating conditions that can fan social problems.

Assessing Current Market Conditions

In emerging markets, everyone is understandably eager to take the plunge and get involved in properties to get their own slice of the golden pie.

Building them gets rampant.

The more apartments are build, it seems that the hungrier the market becomes.

When the demand is finally met, there would be more properties that are still under construction due to the time gap explained previously. More supply is coming up.

This is when the market quickly lands and reality sinks in.

Where are we currently in exactly?

There is also no such thing as unlimited demand.

For most families, only 1 apartment is required to house the family. And when children in the household become adults and move out, the family no longer needs such a big house and down size.

Another thing to take into consideration is that each generation is getting smaller and smaller in numbers.

Younger families no longer have 5 brothers and 5 sisters. Birthrates of generation X and Y are very conservative unlike the baby boomers.

The interesting thing is that the baby boomers are starting to retire.

Baby Boomers are the generation that drove the biggest economic booms in history. This segment is behind almost every major economic trends. And they are starting to downsize simply because there is no longer a need for a property of considerable size.

When we consider the smaller sized families in the new generations, you have to wonder who are going to buy these properties from baby boomers.

When there is an oversupply of properties in the market, the transaction time frame also sharply increases.

A home that used to take 30 days to sell may start to take 50 days to let go. Property values will begin to fall and rental will fall accordingly.

It has now become an easier task to predict these market developments. National policies have made this so.

Developers in Singapore now has up to 5 years to build and sell of their projects.

It also takes an amazingly small amount of time for developers to plan and get permits to build their properties. A project can take just a few months to go from land purchase to show flat sales. The 5 year policy has come at a critical time when a lot of factors are already in play.

When all these projects enter the market, it is very likely that there will be more supply than demand. And the only way to clear developer’s stock before the 5 year deadline is to offer more discounts.

If you indeed bought a property recently and expect to sell it during the time when oversupply hits the market, it is very likely that you will either lose money or make no money.

This is because you have to take into consideration the mortgage charges, agent fees, and other closing costs.

In extreme cases, you might even have to borrow money to get rid of your investment to stop it burning a bigger hole in your pocket.

This is why you have to understand property cycles before investing in property instead of making that decision to buy based on glowing media reports and an assumption that properties in Singapore cannot fail.

Property investment “gurus” will always champion buying at anytime.

Ultimately, they may have a project to sell you after your overpriced seminar. Applying strategies taught by these gurus at the wrong time can result in financial disaster.

How A Growing Job Market Influences The Early Buyers Phase

Singapore seems to be sustaining growth

When we look deeper into demand and supply, one of the key drivers of demand is a growing job market.

At this phase of the property cycle, there is minimal or negative job growth. Jobs had already started to slow down in the previous phase and this is just a spill over effect.

If excess foreign talent come to Singapore for work and does not buy property, there will be no one else to buy premium property.

High level jobs are taken by foreign talent leaving only mass market homes affordable to locals.

The good thing is that cycles move.

When unemployment peaks, the property market will be at it’s lowest.

For a market to move out of this phase, the job market has to grow. Local leaders have to make tough decisions to spark that growth.

When policies begin to take shape, and job markets recover, unsold properties will be quickly snapped up and rental will increase.

Investing In Properties During Early Buyers Phase

You have to be clear that if you are investing during this phase of the property cycle, your primary focus is cash flow from rental income.

It has to be this way as there is no value appreciation.

This means that you have to go big in hot areas or niche areas where there will always be people looking to rent.

A property in your hands that has good cash flow is already in a good position to be a great investment down the road.

The higher your property cash flow, the more flexibility you have on adjusting rents or absorbing vacancies periods.

Be patient as when the market rise again, you will be making a handsome sum while you are banking it with rental cash flow.

Population growth lead to job growth, which leads to the next phase of the cycle.

It takes time to lay the seeds and see the effects that these changes have on the market.

For example, when a MNC makes a decision to set up headquaters in Singapore, it could take years before actually operating here. They may need time to build factories, buildings, organize logistics, and administrative work.

When you are investing in emerging markets overseas, the population and job growth forecast are good starting points to start you research. Get in early and you can find great bargains at bottom prices.



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