The excitement of owning your own home can quickly be overshadowed by disappointment, if, when it comes time to sell, no one wants to pay close to what you originally paid for the property. Boom times may be great for sellers, but if a buyer purchases a property at the wrong time during a boom period, he may be left holding the baby and battling to understand why no one wants to pay a premium when buying his home.
Property experts have a great way of illustrating how boom and bust periods occur and when it is the best time to invest. By comparing the situation to a clock face with the property bubble bursting when the hands reach the 12 o’clock mark, the ideal time to buy a property is when the hands of the clock are at 4 o’clock. By the time the hands reach the 7 o’clock mark, the boom is well under way and buyers are probably already paying too much for the average property. By the time the clock hands reach 9 o’clock, the buying population is at the full mercy of boom prices and from this point on, it becomes increasingly unlikely that buyers, in the short term at least, will recoup the full price they paid if they were to resell the property.
There are numerous stories from people out there that have been caught out because they were not able to recognise that property cycles occur. Sellers, for example, who sold just before a boom period often achieved a lower selling price, while buyers who left it too late ended up paying far too much for the home.
So what is a property cycle and does it always apply? Well according to Homer Hoyt who was the first recorded pioneer to study property cycles, the short answer is yes. In the words of Wikipedia, “a property cycle can be seen as a logical sequence of recurrent events reflected in demographic, economic and emotional factors that affect supply and demand for property subsequently influencing the property market.”
An article by the Global Property Guide, explains the concept beautifully. Bubbles characterise all asset markets. A bubble is an irrational over-investment in one particular sector or economy. What is particularly interesting about property markets is that its cycles, its bubbles and its depressions are (unlike the stock market) so easily predictable.
In other words property cycles are a part of life and every boom throughout history has been followed by a down period until the demand rises and recovery commences before another boom occurs and the cycle starts to repeat itself.
It is pretty difficult, if not impossible, to determine what starts a property buying frenzy (a boom) but the results are nothing short of dramatic. Like lemmings drawn to the sea, everyone wants a piece of the action and it is the activities of an almost insane buying public that force property prices to rise. Interestingly, Hoyt said that the slump is usually the longest phase in the property cycle and can be directly linked to the velocity and duration of the proceeding boom.
While there are a great number of sellers out there who would disagree, Hoyt also said that property values do not necessarily fall during a slump, values may simple stall for a lengthy period. There may be large numbers of South African sellers who do not agree with this statement, but if truth be told, most people, except perhaps those who bought at the end of the boom, will still make a profit when selling the property. It seems that many sellers confuse making a smaller profit with not making a profit at all. Just because you can only sell a property that you paid R800 000 for before the boom for R1.5-million does not mean that you are losing out on the deal. Getting a little less maybe, but you are certainly not going to be out of pocket. The fact that you could have sold it for R1.9-million during the upturn is immaterial and should never be factored into the equation.