Can We Predict When to Invest in Property?

Can We Predict When to Invest in Property?


In 1999, after years of stable property growth, an economist called Fred Harrison predicted that the market would experience a crash in 2007 or 2008. Although he was largely dismissed by his peers, he was proven right as the property market (and virtually the global economy) sunk into a devastating recession. What many of us don’t know is that Harrison’s prediction dates back to a theory from the 1930s that, using historic data from hundreds of years ago, claims that booms and crashes always run in 18-year cycles. According to Harrison, savvy investors using the cycle as a guideline, can predict exactly when to buy and when to sell property, by just using your calendar as a guide. But is he still right? 

Economic cycles do exist. Growth is fueled by increased income, which leads to a great demand for housing and commercial property, which drives up land value (also known as economic rent). The industry starts scrambling to capture the climbing land value through construction activity, and the banks start lending accordingly.  These investments, however, are made purely on the hope of a yield, rather than continuous income (such as rent). When land value starts to fall, building activity tends to stop, credit dries up, the banks that lent against the climbing value of land start to suffer and bad debt abounds – hence a recession or depression. 

Harrison’s theory is that there are always seven years of steady growth at about 5%, followed by small crashes, a period of rest and seven years of rapid double-digit growth preceding a crash. It seems as though making it big in the property market is as easy as marking your calendar in anticipation. South Africa did have a housing boom from 1999-2007, and if you do the math, it does seem like Harrison was spot on. 

But there are other factors that disrupt his theory altogether. The escalating electricity prices, the fall of commodity prices, Brexit, corruption charges. Our economy has been volatile for years, and peaks and troughs are harder to spot. Instead, it’s best to focus on different indicators that the market is shifting, and invest accordingly: 

The Opportunity Phase

The boom has busted and the market is reluctant to invest. Cheap bargains abound due to media doom and gloom as investors sell to avoid further losses. Prices fall and “fire sales” create great opportunities for individuals with a good eye. This is usually the best time to buy – even if your broker says not to! 

The Upturn

New buyers are entering the market because of rock bottom prices. Prices slowly start growing again, but without real media attention. Optimism starts to set in and property goes back on the market. Government stimulus, low interest rates and positive returns are all sure signs that the upturn is underway. However, this is a good time to be selective with your buying, aiming for properties with a great rental income rather than capital growth. It’s an equal phase, neither a buyer or a seller’s market. 

The Tsunami Phase

Big cities are booming, followed by the outlying areas, and spreading across the market. Construction projects are numerous and investors who got in early are enjoying price growth. At this stage there might also be a mid-cycle dip, where the market experiences some negativity – making it a great time to buy before the boom sends prices skyrocketing. 

The Boom 

This phase is marked with huge media hype and buyers are snapping up properties without discernment for fear of missing out. Vendors push up their property prices and houses are selling for more than their asking price. This is usually when you see huge construction projects, such as the Biggest Skyscraper in Africa, underway – banks are confidently supplying funding for these projects because of the double-digit pay-offs investors are enjoying. According to analysts, the last two years of this prosperous final period of the cycle is the absolute worst time to buy – the so-called winner’s curse – because properties purchased during this time then fall beneath the purchase price. During this phase, it’s best to do nothing unless you can find a real yield property. 

The Crash

The bubble bursts as property prices escalate to unaffordable levels and the market crashes. Banks are nervous about lending, finance becomes tough and depressed properties are going for a song. Remember that unless you’ve purchased property during the winner’s curse, the value of your property will always go up, so make sure that you have enough rental income to hang on to it when there’s a recession.

Conventional wisdom will tell you that the best time to buy is always “right now” but it’s important to have a strategy in place. Build your portfolio during the good times and reassess before the crash to weed out under-performers, selling to buy during the opportunity phase. You don’t have to mark your calendar – but keep your eyes peeled.

SOURCE: Gumtree Property




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