Week 1 - USB240 Property Economic and Property Cycles 2018 full size

Refurbishment

Present Refurbishment
Capital
Value Cleared
site
Value

PV
current
use

Time
R1 R2

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Property economic indicators and
economic cycles

What you have learnt so far:
• Three ‘health of the economy’ indicators.
• Property characteristics and market (D & S)
• Economics of Planning

Now, you can watch this video again to review the
same from minutes 3:29 to link it with the economic/
business cycle.

https://www.youtube.com/watch?v=VCcqFUZAbZo

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Business Cycle

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Property Cycle

• Property cycle vs Business cycle
• What is it?
• Why we need to know?
• What is the impact of property cycle on

investment decision?

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Property vs Business cycles

• The Business cycle is defined as the result of
relative shifts over time in the economy’s
aggregate supply and demand. The economic
rules of supply and demand apply to the
property market as other markets with property’s
unique attributes influencing the business cycle.
Property as a commodity is affected by the lag
effect due to the approval, construction
processes and the physical nature of property.

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Property vs Business cycles

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Property Cycle

• The value/opportunity phase
• The growth/boom phase
• The peak phase
• The correction phase

By Ian Hosking Richards

• (http://www.yourinvestmentpropertymag.com.au/expert-advice/ian-
hosking-richards/understanding-property-cycles-119570.aspx)

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The value/opportunity phase

• This is the beginning of the cycle and the best
time to jump in to the market for maximum gain.

Prices start to rise slowly and the pace of the
market gradually increases.

– However, many novice investors miss this opportunity
because they fail to spot this phase of the cycle,
particularly in the early stages of market recovery.

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The growth/boom phase

• At this stage in the property cycle investors are
getting more confident because they can
actually see prices increasing.

– As this phase gathers momentum more and more
investors enter the market, encouraged by rising
prices and positive market sentiment.

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The peak phase

• At the peak of the market investors are still piling in
to the market, fuelled by continued buoyancy in the
market and caught up in the feeding frenzy.

– More inexperienced and timid investors now enter the
market, simply grabbing anything so as not to miss out

on the assumption that the market will continue to perform
well.

– Active phase in the cycle for investors it is by far the most
dangerous as the overheated market can end very
abruptly as sentiment suddenly turns from euphoria back
to reality.

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The correction phase

• This is the stage where buyer’s remorse kicks in.
Values are likely to drop and may remain
subdued for some time, perhaps years.

– Investors jumped in to the market at the peak, they
often compound their mistake by selling at end cycle.

• An understanding of what drives property markets
and an acknowledgement of which phase of the
cycle a particular area is likely to be in is a much
sounder approach than simply following the
crowd.

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Why we need to know?

• Property is long term investment
• The best time to buy is …..
• The best time to sell is ….

• Price
• Time
• DO NOT BE FOLLOWER

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Impact on investment decision

• An understanding of property cycles is an
essential tool for the property investor.

– Inexperienced investors to act emotionally and make
poor decisions.

– Seduced by long periods of sustained growth and
frenzied market activity.

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Property cycles research

• Property cycles are driven by a number of micro
and macro economic factors (Boyd et al. 2004).

– Such linkages broadly include the nature of the
economic climate, credit availability, and the level of
employment growth, which affects market supply and
demand, and by implication, prices and rent.

• Researchers have also found that investors
over-value property assets during the peaks of
property cycles and, conversely, under-value
assets during cycle troughs

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Parameters to model property cycles

• Building rents;
• Regional / centre building vacancies;
• Property income and capital returns;
• Property values;
• Construction activity and development approvals;
• Construction costs;
• Building space absorption; and
• Property yields / capitalisation rates.

Source: Boyd et al. (2004)

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Dominant economic parameters

• Employment growth;

• Inflation;

• National and regional economic activity (GDP);

• Interest rates;

• Share market activity;

• Alternative investment returns;

• Capital availability; and

• Foreign investment.

Source: Boyd et al. (2004)

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Reproduced from Born and
Pyhrr, 1994.

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Reproduced from
Pyhrr, Born, Manning
and Roulac, 2003, p. 8.

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References

• Born, W.L. and Pyhrr, S.A. (1994) “Real Estate Valuation: The effect
of market and property cycles, Journal of Property Research, Vol.
11, pp.19

• Boyd, T, Kimmet, P., Cowley, M. and Tonelli, M. (2004) “Evaluation
of the functionality of commercial highrise”, CRC-CI project 2001-
11C, Brisbane.

• Pyhrr, S. A., W. L. Born, C. A. Manning and S. E. Roulac (2003)
“Project and Portfolio Management Decisions: A Framework and
Body of Knowledge Model for Cycle Research”, Journal of Real
Estate Portfolio Management, Vol. 9, No. 1, pp.1-16

• Tonelli, M., Cowley, M. and Boyd, T. (2004) Forecasting office
building rental growth using a dynamic approach”, Pacific Rim
Property Research Journal, Vol 10, No. 3, pp.283-304.

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What have you learnt today?

• Property Economic Fundamental

– Economic Indicators
– Economic Characteristics of Property
– Property Market
– Demand and Supply
– Economic of Planning

• Property Cycle

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