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Property Market Cycles – Phase 4 Late Sellers
The final phase of the property market cycle is Phase 4 Late Seller. This is the riskiest period to be investing in properties. It is a time that you want to avoid being locked in as much as possible.
At the start of this phase, properties are left unsold for an extended period of time. No longer are buyers engaging in bidding wars to buy an already overpriced property. A seller will be lucky just to get someone to make an offer at valuation. A big reason why real estate can remain unsold for a very long time is because sellers still think their properties are worth a lot. They have also spent a huge sum on their apartments and their emotions will not allow them to sell of the unit at a loss. The number of properties available for sale increases as more and more people are calling it quits.
However, at the start of this phase, prices are still good. Land are still being bought at high prices, constructions are still going on for new projects. It becomes evident that there will be an over supply. It is at this point where job growth will start to slow down. Big investors start getting bad reports from their analysts. They start planning their exit or exit immediately. They have already made gains and it is time to actualize them. They might have also bought at a high which means they have more to lose should the real estate market come tumbling down. It now takes almost an eternity for properties to go from listing to being sold. As unsold properties continue to increase in numbers, seller will start to panic and take drastic measures just to let go.
This is the time when a panic reaction from a major player can trigger a great sell off. For example, a big developer may stop building or slash prices of unsold apartments. Competitors become grateful as they can now slash prices as well on the pretense that they are reacting to competition instead of admitting that the market marathon has ended. As big players make the move, individuals follow suit in a state of panic. Because in all honesty, how can an individual compete with a big developer except on price?
The market will then be flooded with listings putting an irresistible downward pressure on prices. Savvy investors will have left the market long ago. They won’t be here to scoop up these properties.
There are 2 key indicators that will serve as a warning that this phase is about to take shape.
The first is again concerning the growth of jobs. When there is no job growth, property investors suffer. In the Singapore context, foreign talent is the answer to job growth. When growth becomes stale, we may even start seeing population loss. With a smaller population, demand will drop. So there is a good chance that the next phase is knocking on the door.
The second indicator to look out for is undoubtedly supply of real estate. Overbuilding is something that happens in emerging markets. When there are more properties for sale than there are buyers, prices has to decrease. It only make sense that way. Developers have to pay interest on their financing and when the time comes, fully repay their loans. If a developer has in fact used it’s own money to fund construction projects, they will be the laughing stock of the market by not gearing up to build projects.
If population indeed start to decrease, there are simply not enough people to absorb the oversupply of properties. This can result in a flurry of foreclosures taking over the market. This could be a reason why the Singapore government is reluctant to put up too much restrictions on importing foreign talent.
When there are so many apartments available for rent, tenants have a wide variety of choices to rent. You will then have to lower rentals just to get someone to live in your apartment. And if that rental is not even enough to cover your mortgage, you have to ask yourself whether it is worthwhile to keep this property at all. But since the market is going south, who would be willing to sell at a loss? Oversupply has always been the scourge of the real estate market. When the transaction time start to increase marketwide, it is time to review whether you should exit the market. Selling your property in this phase will also mean that you may have to grant many concessions just to close a deal.
If you really must invest in properties, you might take this time to consider investing in emerging markets like Bangkok and Jakarta. The longer you stay in this phase of the market, the more sleep you would lose and you will start to shiver whenever news reports come out about the market going down.
Investing In Properties During Late Sellers Phase
The logical emotionless thing to do is to sell what you have and move on to other investments. There are a lot of alternative investments you can consider other than properties. You might also take this chance to consolidate your money so that you have all the ammunition to fire when the market cycle moves into the next phase again. From a pure investment standpoint, sell as soon as possible when you find that that the market has entered the Late Sellers Phase.
If you have to buy, the best time to buy is during the late stages of this phase. This is when you are going to find apartments at prices you could only have dreamed about during the buyers phases. If you try your luck, you might even get a hold on good apartments at half the valuation.
Exponential wealth is created by savvy investors who buy at the most miserable period of this phase. It takes courage and a deep understanding of the property environment to do this.
When you really have to hold onto a property for one reason or another, you will want to consider beefing up the equity in your property. 50% equity with 50% loan is a safe ratio. With little equity, you might just face foreclosure when interest rates explode. Also make sure that you do your calculations on how your cash flow is going to survive this period. Always take into account the possibility of vacancies. This will hurt your cash flow most. When vacancies occur, it is what you have in the bank that will save you.
Finally, be patient as the market will eventually recover. This is a market cycle after all. It will move into the early buyer phase again. In dynamic markets, this can happen sooner than you think. However, there is always a prospect of this phase stretching out over many years.