Grasping the concept of the property or real estate cycle is essential for valuers. A valuer must possess a solid understanding of macroeconomic conditions and their impact on the property market. To build that foundation, let’s begin with a broad overview of the property cycle.
What Is the Property Cycle?
Think of fashion trends, there are times when a certain style becomes extremely popular, prices soar, then interest fades and prices drop. The property market behaves similarly. Whether it’s houses, apartments, land, or office buildings, the property cycle refers to the repeated rise and fall in property prices and transaction activity over time.
The property cycle typically follows a recurring pattern consisting of four key phases:
- Recovery
- Expansion
- Hypersupply
- Recession
This framework helps us assess the current state of the property market and forecast potential investment returns. However, the duration of each phase is unpredictable and influenced by various factors such as economic conditions and government policies. In Indonesia, for instance, a historical “10-year cycle” pattern has been observed, but this is not a fixed rule.
The Four Phases of the Property Cycle
1. Recovery Phase
After reaching a market low, when property prices have dropped significantly, the market slowly begins to recover.
- Conditions: Few buyers and tenants, many vacant properties. Prices remain low or just start to rise. New construction is minimal.
- Opportunities: This is often the ideal time for cash-ready buyers or investors to acquire properties at lower prices.
2. Expansion Phase
The property market is heating up and active.
- Conditions: Strong demand for properties to buy or rent. Prices are rising rapidly. Many new development projects emerge due to high demand, and it becomes difficult to find vacant properties.
- Opportunities: Developers thrive in this phase as projects are likely to sell quickly, and sellers can achieve high profits.
3. Hypersupply Phase
This is the “overbuild” phase that follows expansion.
- Conditions: Oversupply of properties due to aggressive construction in the previous phase, but demand doesn’t keep up. Many properties sit empty, and prices stagnate or begin to decline gradually.
- Opportunities: End-users (those buying to use the property themselves) benefit from a wider selection and more competitive pricing.
4. Recession Phase
The most challenging and quiet period in the property market.
- Conditions: Economic slowdown, job losses, and reduced incomes lead to fewer people being able to buy or rent property. Many properties are vacant, prices fall sharply, and new construction almost stops. Banks may repossess properties due to loan defaults.
- Opportunities: Similar to the recovery phase, this presents a golden opportunity for bold investors with available capital to acquire properties at steep discounts.
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Why Does the Property Cycle Occur? (Key Drivers)
Several major factors influence the movement of the property cycle:
Macroeconomic Factors
- Interest Rates: When mortgage rates rise, loan repayments become expensive, reducing buyers’ enthusiasm. Conversely, low interest rates make property more affordable and stimulate buying activity.
- Employment & Income: Stable employment and decent wages give people the confidence to invest in property. Economic hardship or widespread unemployment causes demand to shrink.
- Economic Growth: When a country’s economy is growing, people feel more secure and are more likely to invest in real estate.
Population & Lifestyle
- Population Growth: A growing population increases demand for housing.
- Lifestyle Trends: Changing preferences, such as a shift toward urban apartment living, influence the types of properties in demand.
Government Policies
- Taxes: Property tax regulations directly affect market prices. Tax increases can suppress sale values, while incentives can boost transactions and investments.
- Development Permits: Stringent building regulations reduce supply, while relaxed permits encourage new development.
How Do We Know Which Phase We’re In? (Key Indicators)
To identify the current phase of the property cycle, watch these indicators:
- Vacancy Rates: The number of unoccupied homes, offices, or apartments.
- Property Prices & Rental Rates: Trends in asking prices and rents.
- Construction Activity: The volume of new development projects underway.
- Transaction Volume: The frequency of sales and lease transactions.
- Mortgage Rates: The cost of borrowing money to purchase property.
Examples of Property Cycles Around the World
This phenomenon is global:
- United States: Experienced a major property crisis in 2008–2009, leading to mass foreclosures. The market eventually recovered.
- United Kingdom: Known for the “18-year property cycle,” where price patterns recur roughly every 18 years.
- Indonesia: The property boom of 2013–2014 slowed afterward. During the COVID-19 pandemic, the market entered a recession phase and is now gradually recovering.
The Impact and Strategy at Each Phase
The property cycle affects every stakeholder:
For Homeowners/Sellers:
- Expansion = High prices, potential profits.
- Recession = Falling prices, lower asset value.
- Strategy: Maintain your home, and avoid panic selling during downturns.
For Property Investors:
- Recovery & Recession = Best time to buy at low prices.
- Expansion = Prime time to sell and realize gains.
- Hypersupply = Caution: hard to rent or sell.
- Strategy: Buy low, sell high—align with market dynamics.
For Developers:
- Expansion = High construction activity and sales.
- Hypersupply & Recession = Risk of unsold inventory.
- Strategy: Respond to market demand without overbuilding.
For Banks & Lenders:
- Expansion = Loan applications surge.
- Recession = Higher credit risk from defaults.
- Strategy: Tighten lending standards in weak markets.
Final Thought
Understanding the property cycle is essential to help us make wiser decisions about real estate, whether for personal residence or investment purposes. Anyone considering entering property investment should go beyond simply following trends.
For valuers, a solid grasp of the property cycle provides critical context and a deeper understanding of the value being determined.
Warm regards,
Penilai Publik – Property Valuer & Advisor
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Penilaian.id oleh Asti Widyahari
Property Valuer & Advisor
Ni Luh Asti Widyahari, S.T., M.T., MAPPI (Cert)., is an experienced property valuer and advisor based in Jakarta, Indonesia, with extensive expertise in property valuation and property consultancy. She is the founder of Penilaian.id and CekNilai.id. Asti is also an active speaker at international conferences, promoting the property valuation profession and professional development in the sector.
Tentang Asti Widyahari
Ni Luh Asti Widyahari, S.T., M.T., MAPPI (Cert)., adalah Penilai dan Advisor Properti berpengalaman yang berbasis di Jakarta, Indonesia, dengan keahlian dalam penilaian properti dan konsultasi properti. Ia adalah pendiri Penilaian.id dan CekNilai.id. Asti juga aktif sebagai pembicara di konferensi internasional, mempromosikan profesi Penilai dan pengembangan profesional di sektor ini.
